These were an extraordinary set of national accounts and labour force data.
BOOM! In real terms, GDP grew by 1.3% in the March quarter for an annual increase of 4.3%.
CRASH! In nominal terms, GDP rose a paltry 0.3% in the March quarter after a 0.3% rise in the December quarter meaning annualized growth over that period of about 1.25%.
Employment rose – again – and the unemployment rate continues to hover around 5 to 5.25%. This is more in the middle, but a very pleasant result as well.
Which of these results matters?
As the terms of trade fall away, we are likely to see more of the same – resilience in the real GDP side of the economy but weakness – perhaps severe – in the national income side of the economy.
What matters for the RBA is the nominal side of the economy – that is, the bit that takes account of inflation. The RBA is an inflation targeting central bank and now we have all measures of inflation at no more than 2.1% and from the national accounts, many are around a 0.5% to 1.0% pace. With an inflation target of 2 to 3%, the RBA is (or rather was) over-egging the cake.
It is also the nominal side of the economy that matters for profits, incomes and the budget. These are all soft, notwithstanding the blockbuster growth in real GDP. The overall rate of economic expansion has, nonetheless, fed into demand for labour with employment growth kicking higher after a flat patch in late 2011 and early 2012. This is arguably as important as the GDP result for checking the inflation risks for the economy and given the strength in both sets of data, the downside risks to future inflation pressures have also clearly abated.
Despite this run of massively better news, share and house prices remain weak, global markets have ruptured, which is likely a concern. Thankfully, the RBA has cut official rates by 75 basis points in the last two month, but the government has gently tightened fiscal policy all of which means the economy is entering a period that will be particularly difficult to read.
Until now, the economy was meandering along below potential and one must recall that around 0.5 to 0.8 percentage points of the 4.3% annual growth in GDP in the year to the March quarter is a function of the June quarter 2011 growth rebound after the Queensland floods. Next quarter, a 0.8% quarterly growth rate will drop annual GDP to 3.5%. Still good, but not as spectacular as 4%.
The RBA looks set to sit tight in July – it has caught up nicely to the previous period of sub-trend growth with the 75 basis points of rate cuts in the last 2 months and it has been dealt some pleasantly firm local news.
In a funny quirk for fiscal policy, the next few months are likely to be quite stimulatory with personal payments, the ending of the flood levy and other areas where spending has been brought forward adding to demand. This is likely to boost upcoming data which will again work against further RBA action.
The fiscal contraction for 2012-13 is still there but its greatest contractionary force is likely to be in the December quarter and beyond – hopefully not when the global economy is spirally into the abyss.
The RBA knows all of this, even if many in the markets don’t. That’s why they cut and why more cuts are still much more likely than not.