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These GDP numbers will set recession tongues wagging

September quarter GDP figures will spur talk of recession.

September quarter GDP figures will spur talk of recession. Photo: Getty

With economic activity contracting more sharply than expected in the September quarter, it’s natural to wonder if Australia is heading into its first recession for 25 years.

Adjusted for inflation, gross domestic product (GDP) fell 0.5 per cent over those three months, pulling down the full year growth figure to just 1.8 per cent.

That’s very weak for an economy where ‘trend growth’ is considered to be around 3.3 per cent, so many people will wonder if we’re headed for two consecutive quarters of negative growth – the technical definition of a recession.

The short answer is ‘almost certainly not’, which will surprise regular readers of this column – until very recently all indicators were pointing down.

What’s changed? Well, whatever one thinks about the election of Donald Trump as US President, that shock event in early November changed everything.

A long period of economic stagnation that was ‘baked in’ for Australia, is now far less likely – primarily because if Mr Trump launches a huge infrastructure spending spree as he’s promised, global commodity prices will rise and Australia will be a big beneficiary.

That might just save Treasure Scott Morrison’s budget bacon.

Statistical noise

Beyond the Trump factor, there are other reasons to doubt that one terrible quarter will lead inexorably to another.

Treasurer Scott Morrison will be pinning his hopes on commodity prices staying high.

Treasurer Scott Morrison will be pinning his hopes on commodity prices staying high.

Firstly, as Wednesday’s data release noted, Australia’s terms-of-trade have already improved 4.5 per cent in the September quarter.

That means the price of what we’re selling abroad has improved relative to what we’re importing. In particular, iron ore is trading at $US77 a tonne, when just a few months ago there were fears it was headed well south of $50 a tonne.

That doesn’t mean the mining boom is back – only that things are better than forecasters had assumed a few months ago.

 National income boost

The terms-of-trade boost has fed into the most positive number in Wednesday’s national accounts – namely, national income.

As economist Saul Eslake points out, a year ago economic output was expanding well in real terms, but the prices of exports were very low. That was bad for national income, and bad for government tax revenues.

A year on that has been reversed. Real economic growth is weak, but the prices paid for exports are strong. That’s better for national income and better for government revenue.

So the rosiest number in the national accounts this time around was ‘real net national disposable income’ which rose by 0.9 per cent over the quarter in trend terms, or 3.3 per cent over the year.

Some big caveats

That doesn’t mean you’ll necessarily be feeling much richer.

The first reason, which Australian economic journalists should have tattooed to the backs of their ever-typing hands, is that strong population growth dilutes these aggregate growth rates.

The 3.3 per cent jump in ‘net national disposable income’ has to feed, house and clothe a population that is roughly 1.4 per cent larger over the same period. So in per capita terms, national disposable income has grown by only 1.9 per cent.

Moreover, that gain does not benefit everyone evenly. As shadow treasurer Chris Bowen pointed out, the past 12 months have seen “the loss of 90,000 full time jobs, new record underemployment and new record low wages growth”.

Shadow treasurer Chris Bowen: focused on the loss of 90,000 full-time jobs.

Shadow treasurer Chris Bowen: focused on the loss of 90,000 full-time jobs.

The two biggest negatives in this set of national accounts are public and private fixed capital formation – which means the amount of new capital assets invested in during the quarter.

Private capital investment dragged the quarterly GDP figure down by a 0.6 percentage points, but public fixed capital investment fell much more – 2.1 per cent in seasonally adjusted terms.

But even that last figure is misleading. Government capital spending tends to be pretty “lumpy”, as Saul Eslake puts it, as major projects are finished within one accounting period or another. So that figure is likely to bounce the other way next month.

Miner drag

Mining investment continues to wither. It fell 10.6 per cent over the quarter, partially offset by non-mining investment which grew 4.8 per cent.

And like most of the other figures, mining investment is not felt evenly across the nation – it helped final demand figures to plunge lower in WA (-3.8 per cent) and the Northern Territory (-4.7 per cent), while most other states saw final demand grow slightly.

Overall, these ‘terrible’ GDP numbers paint a mixed picture of an economy keeping its head above water through higher commodity prices – a fact reflected on the Australian Securities Exchange, where shares closed up 0.9 per cent.

That’s not bad on the day of a ‘terrible’ data release.

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