This morning’s testimony to Congress from Ben Bernanke should wipe the smiles off our faces.
Yesterday’s GDP figure for the March quarter was terrific news, no doubt, and will put a spring in the national step, but when you look closely, the numbers were good in only one respect, and even that was two-sided: private consumption rose, offsetting a business slump, but it was debt-funded.
As Gerard Minack of Morgan Stanley has pointed out, we are doing a Homer Simpson: “Beer (read: debt) is the cause of, and solution to, all of life’s problems.”
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Last night Minack came up with a surprising analysis of the national accounts. He said the increase in GDP was entirely due to a change in the way the Australian Bureau of Statistics tracks commodity prices.
“Usually the Bureau waits for the major contracts to be settled, and factors in the price changes in the June quarter (because the contract prices are set from 1 April). Yesterday it announced that it was actually factoring in lower prices in the March quarter. Factoring in a lower price implied a higher volume for exports, which lifted GDP.”
In other words, the lift in GDP was statistical jiggery-pokery.
Then there’s the fact, as Stephen Koukoulas of TD Securities pointed, that GDP per capita has fallen for four straight quarters and is down 1.6% for the year. So the only thing keeping GDP positive is population growth.
But aren’t these guys just grizzly bears, trying to rationalise the fact that they were wrong about Australia falling into recession?
Maybe, except the retrenchment in business investment (down 1.1% in the March quarter) is consistent with more job losses in future and, more importantly, falling incomes.
Last year I suggested we might have the first “full employment recession”.
Well, what I didn’t predict was that more debt would produce a further rise in household income (up 0.9% in the March quarter) and that would be bolstered by the government giving everyone $12 billion of borrowed money as well. (That’s on top of the boost to disposable incomes from lower mortgage rates and petrol prices).
Debt has a habit of catching up with you – and as Federal Reserve chairman Ben Bernanke was banging on about this morning in this testimony to the US Congress:
“…near-term challenges must not be allowed to hinder timely consideration of the steps needed to address fiscal imbalances. Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth.”
That’s about as tough on the subject of government debt as a central banker gets.
And he wasn’t exactly whooping it up about recovery either: “We expect that the recovery will only gradually gain momentum and that economic slack will diminish slowly. In particular, businesses are likely to be cautious about hiring, and the unemployment rate is likely to rise for a time, even after economic growth resumes.”
But whereas in the US all the borrowing is now being done by the Government, in Australia the burden is being equally shared. The US savings ratio has gone from zero to 5.7%, while in Australia it continued to fall, and is now down from 6 to 1.8%.
Bernanke warned this morning that the US must begin to address “fiscal imbalances” (too much debt) immediately. If he were speaking to Australia, he would be wagging a finger at both the Government and consumers.
So has Australia avoided recession? Ask again in a year or two, when the new global mood of thrift and caution finally arrives Down Under.
This article first appeared on Business Spectator.