Good news on economy, but challenges remain

The better-than-expected economic growth figures were a surprise, particularly to all those well-paid economists who predicted lower to flat numbers, but I wouldn’t break out the champagne yet.

After more that a year of telling people through the dbdata ‘data news’ column that the economy was performing better than expected in transition, I’m worried about performance over the next few years.

I have to agree with Federal Finance Minister Mathais Cormann that the economy is ‘delicately balanced’.

But first let’s look at the numbers as assembled by our friends down at CommSec.

The Australian economy: Up 1.1 per cent in the March quarter which converts to a yearly number of 3.1 per cent – above the 15-year trend line of 2.9 per cent

The non-farm economy: Up by 1.1 per cent in the March quarter after a rising by 0.7 per cent in the December quarter. Annual growth stands at 3.2 per cent.

Farm GDP: rose 2.9 per cent in the March quarter after expanding by 2.3 per cent in the December quarter.Growth drivers: The biggest contributions to growth came from net exports, household spending, government consumption and dwelling investment. The biggest drag on growth was from non-residential building.

Inflation: Basically there isn’t any and that includes wages growth. Annual inflation growth is 1.2 per cent – the lowest rate in 12 years

Consumer spending: Household spending rose by 0.7 per cent in the March quarter to be up 3.0 per cent for the year.

Industry sectors: Thirteen of the 19 industry sectors expanded in the March quarter. The strongest sector was mining, up 6.2 per cent and adding 0.5 percentage points to growth.

So where did the growth come from in those exports figures.

As you can see from above we’re still getting a bang from the mining industry – prices may be down but volumes are up – and most minerals and energy deliveries are still paid for in US dollars giving suppliers a cushioning effect. Agricultural exports are also starting to feature regularly in the growth numbers.

But the good news was reccorded by those export-based service industries including tourism, education and financial services,

So why am I worried? Unlike many of those economists who never hit the street, my contacts in small businesses and retail were telling me last year that things had picked up and they were having trouble getting staff. All good news.

Apartments just keep springing up

This year the story has changed. Since February the talk is of a year-on-year fall in revenue, increased cost pressure mainly from landlords, and continuing nervousness about the pending Federal election.

The building industry has done a great job of helping the Australian economy transition from a resources economy to a service-based one underpinned by a cheaper Aussie dollar.

But there is no doubt we are heading for a slowdown in housing construction. The recent surge is a bit of an aberration based on investors trying to beat changes to negative gearing if Labour gets back into government. Even the resilient car industry seems to be slowing down.

The Reserve Bank has tried to anticipate this by pushing through by a small cut in interest rates, but the looming apartment oversupply situation – particularly in Melbourne and Brisbane- is going to bring pain. Any economic breakdown in China will also impact on tourism, and resource exports and no one really knows what will happen if Britain actually does exit the EU.

Further cuts in interest rates may be in offing, but rates are already so low that I doubt they will have any real impact, particularly in getting business to invest. The latest business numbers show a lift in volumes but a contraction in profit margins. Also the latest minimum wage decision is another reason business will keep its hands in its pockets.

It seems to me we need to get the Federal election out of the way and start pumping money into those large long-promised infrastructure projects that will feed money and jobs into he economy. It would also act as a buffer against any external shock that may be just around the corner. Fingers crossed.

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