You may be surprised by how calmly everyone has received today's GDP figures. Truth is the numbers were expected and can be easily explained away. The economy contracted by 1.2 per cent in the March quarter. That brings the annual pace of growth to 1 per cent. Most of the damage was done via the export sector.
Specifically, the floods and cyclones to devastate Queensland over the summer halted the exports of coal and iron ore for several weeks, if not months. There was also some agricultural damage. In addition to this, the higher Australian dollar has also hurt tourism, manufacturing and the education sector.
The good news is that these are all short term phenomena. Or at least some of them are. We do know that exports will recover and as they do the economy will welcome the resumption of that income source. It's unlikely the Aussie dollar will fall significantly any time soon but that's not crucial to the economy moving forward in the short term.
So what does this mean for interest rates? Well despite today's numbers being impressive, it really shouldn't hold your attention to much. The RBA's charter includes maintaining full employment, ensuring currency stability, and overseeing the welfare of the Australian people. Now while GDP fits in with the welfare of the Australian people, the RBA has really made it clear it's hell bent on fighting inflation. I guess they believe that if they get inflation under control then full employment and a stable currency will follow. This isn't well understood. The point being that whether or not we get a rate rise or two before the end of the year will depend almost entirely on the inflation numbers we get in the coming months and the Reserve Bank's forecast for inflation.
At the end of the day, whilst the GDP numbers today were humbling, we're unlikely to see a repeat of them anytime soon. China is still growing strongly, the Aussie dollar is no longer appreciating (has held around 105/7 US cents now for over 4 weeks) and reconstruction efforts for flood-effected states is now well underway. What we need to watch for though is the retail and manufacturing sectors, and, of course, inflation. These, I believe, are still wild cards.
David Taylor
