As I observed a few days ago, the RBA was ambitiously punting on a "new normal" in conservative consumer behaviour. And they believed this new normal would persist. In short, they reckoned households would save more than they had in the past, gear up less, and generally "make room" for the booming resources sector. The point being that the RBA is expecting very strong household income growth over the next year or two, and does not want to see all sectors of the economy booming at the same time for fear of stoking inflationary pressures.
The RBA's thesis was that consumers had been seared by the experience of the GFC, and the post-GFC mindset was very different to their pre-GFC behaviours. I never really bought into this idea. In fact, I have put on the record that I thought the risks were skewed in a very different direction. As Joe Stiglitz apparently opined, Australia's contribution to the GFC was its name, and that's about it.
Aussie consumers did not lose their jobs (UE peaked at just 5.8%), did not experience high defaults, and did not suffer big falls in the value of their housing wealth. On the contrary, they had cash thrown at them like it was going out of fashion with the third biggest fiscal stimulus in the OECD.
Aussie consumers were told that this was the worst financial crisis in 75 years--but their disposable incomes rose strongly. No, the risk with the Aussie consumer is that of hubris. They might not gear up quite as much in the past, but with reasonable interest rates and bounding optimism, it was no surprise to me that household spending shocked in yesterday's stunning GDP print. There were a lot of investors out there who were punting on poor data and the RBA having to cut rates. They have now done their dough. For a summary of the results, here is Scott Haslem's (UBS) take:
"Overall, today's data reveal an economy growing well above trend into the middle of 2010, as our long-forecast collision between a strongly investing public sector and rebounding private sector plays out (particularly for consumption & housing). At +1.2% in Q2, and with net upward revisions, the past 3 quarters have averaged +1.0% - or an annualised 4%, a clearly above trend pace. Key to this quarter is the strength in private demand, with growth of a real 1.0% in Q2, lifting its pace to a real 2.5% y/y, its best in a couple of years. The upward surprise came in the consumer sector, where growth was at its fastest since early 2008, as the retail sector (again) clearly missed out on the consumer dollar. To this is added the long awaited rebound in housing construction, and strong export demand. With the level of inventories low, nominal GDP at 10% y/y, and solid household compensation growth, we continue to see solid 2H10 growth (before some slowing into 2011).
Today’s data are consistent with our forecast that growth this year would be above consensus and the RBA, with GDP growth likely to be above 4% y/y into 2011, against consensus for 3½%. For monetary policy, with the saving rate dropping to 1.5% from 3.4%, this is not the cautious consumer the RBA has been looking for, to manage demand pressures and limited spare capacity evident in the construction and mining sectors, and to this extent, today's data bears warning for those expecting rate cuts any time soon. We continue to expect rates to be 75bp higher by mid 2011 (5.25%), with the likelihood that the RBA will be back in action before the end of this year."
