Mining contributed the lion's share of the economy's growth in the March quarter. Photo: Michele Mossop
Well that was nice – a year of above-trend economic growth with rising labour productivity and profits, low inflation and interest rates, capped by falling unemployment and real labour costs.
Just don’t expect the more vocal members of the business lobby and conservative politics to acknowledge it.
And too bad it’s downhill from here.
Today’s better-than-expected March quarter national accounts economic scorecard effectively rules off the pre-Hockey economy.
According to what last month’s budget promised and the best guesses of the Treasury and Reserve Bank boffins, the year to March 31 was as good as it gets until 2016.
And we all know how hard it is to forecast a couple of years out.
The report card tells us some good things about how the economy was travelling, but it only hints at the factors that matter in divining the year ahead.
It’s great that our investment in the resources industry is paying off so handsomely – the mining industry accounted for 80 per cent of the lift in GDP - but the fall in our terms of trade is likely to worsen this quarter. (There is a tendency in some quarters to say “if you don’t count exports, the economy’s bad” – but exports are a key part of what we do right now. It’s like telling a farmer his business is in a bad way if you ignore what he grows and sells.)
The most immediately important bit is what’s happening with household consumption, which makes up the majority of the economy.
It grew by 0.5 per cent in the March quarter, but since then we’ve had sharp falls in consumer confidence leading up to and after the budget.
What consumers say they’ll do and what they actually end up doing aren’t necessarily the same thing.
But the past two months’ retail sales numbers indicate wallets aren’t being bashed as strongly as they were in the previous six months, never mind the mild weather effect damaging many shops this month.
The national accounts repeated the news we already had that workers’ remuneration is barely keeping pace with inflation, depending on how it’s measured.
Real unit labour costs are down and labour productivity is rising sharply (told you so) . That’s nice for business, or at least some businesses.
Problem is, it’s hard to expect household consumption to grow much if income isn’t.
The employers whinging about the cost of labour only mean their own employees – they want everyone else’s employees to be paid nicely so they can afford to buy stuff. Former colleague Ian Verrender has spelt out the danger of slashing wages, a desire normally held only by those whose own income growth vastly outstrips the average.
The federal budget specifically excuses the problem of low wages growth by relying on the “wealth effect” of rising house and equity prices to get consumers spending more. It’s not a particularly sustainable model.
What’s worse, relying on the “wealth effect” can only work if consumer confidence is in a nice place.
Both consumer confidence surveys show it’s been whacked by the budget and not without reason.
Most of the proposed savings come from those with the least capacity for discretionary spending – so that spending is less likely to occur. For those among us being paid a few hundred thou’ a year, the 2 per cent deficit tax won’t really prevent many restaurant meals or new shoes.
And then there’s the investment side represented by public and private gross fixed capital formation.
The private sector put in last quarter while the public sector took out.
Joe Hockey’s first budget will take out more in the year ahead as deficit reduction is given priority.
On the expenditure side of the accounts, government final consumption subtracted from growth in the March quarter but was still up over the year. It won’t be over the next year.
The fiscal contraction is something the RBA regularly reminds us about. It was there again in the governor’s brief statement after yesterday’s board meeting: “Public spending is scheduled to be subdued.” Understated types, our central bankers.
On the upside, there are some wonderful liquefied natural gas projects proceeding that will further lift our export income.
The strong dwelling approvals figures of the past year are yet to be fully realised in housing starts, let alone completions. Indeed, the lag has become considerable thanks to so many of them being large blocks of units. Our trading partners are growing nicely and Asian tourism is on the rise.
And that’s about it. It’s been a good year. Hope you enjoyed it. Now we’re flicking the switch to more ideology (competitive federalism, free-market universities) and less pragmatism.
Michael Pascoe is a BusinessDay contributing editor.