Australia’s upbeat GDP won’t hide hard times ahead

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So Australia’s GDP grew above expectations, up by by 0.9 per cent over the quarter, putting the annual rate of growth at 2.3 per cent.  This was better than expected as analysts surveyed by Bloomberg had expected it to grow 2.1 per cent.

Treasurer Joe Hockey, never the sharpest knife in the block, has castigated those talking about dark clouds and recessions as a bunch of “clowns”.

Why then did the Australian sharemarket slump on the news, falling back to the level it was back in January? No explanations from Hockey.

There’s a good reason for the slump: the robust figure is hiding some real problem issues for the Australian economy.

First, when you analyse the numbers, the higher than normal GDP was boosted only by exports and inventory. Strip that out and domestic demand was as flat as a place-mat. Weak household income was weighing down on spending because wages in Australia have gone nowhere over the past 12 months.

As National Australia Bank chief economist Alan Oster says, domestic demand is flat-lining and that means the GDP numbers are not that good.

“You’ve got consumption growing at about 0.5 [per cent] which is really weak, you’ve got a lot of growth in construction of apartments and that sort of thing, but you’ve got a big hole in business investment which is driven mainly by engineering construction, which is the mining bit,” Oster said. “The total economy is growing 0.9 [per cent] but the local economy, outside the stocks and the exports, is basically zero.”

Or as The Wall Street Journal observes, future growth will be constrained by a continuing reluctance among firms in both mining and non-mining sectors to boost hiring and investment, Also, GDP growth is well below levels needed to bring unemployment down from near-decade highs. And finally, the downturn in mining investment has only just begun.

So despite the better-than-expected data for the first quarter, Australians can expect more pain in the wake of plunging commodity prices and low household spending.

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