The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Wednesday, September 7, 2011

RBS: "A strong GDP result driven by the consumer"

RBS's highly regarded economists comment today (note remarks on links between actual consumer spending and the monthly retail and consumer confidence surveys):

"There was strong growth outside of mining

With all the talk of a two-speed economy in Australia, you would be forgiven for thinking that the economy outside of mining was in recession. That certainly isn't the case, as there was strong growth outside the resources sector.

That is, mining production was flat in the quarter, failing to recover after the flood-driven 6% drop in Q1 (although we suspect this is driven by the Bureau of Statistics' decision to change how it seasonally adjusts coal exports).

This means that the strong GDP result was driven entirely by a 1.3% gain in the non-mining sector, which is now growing at a solid rate of 2.4% (compared with overall annual GDP growth of just 1.4%).

Non-mining GDP has actually been outpacing overall GDP since late last year, prior to which it tracked only marginally below (as the chart shows). This is despite the popular perception of recession-like conditions in the non-mining sector.

Consumer spending was unexpectedly strong as households continue to switch from retail goods to services

Consumer spending surprised with a strong 1.0% rise in the quarter, despite weak retail sales and sharply falling car sales (the latter reflected temporary disruptions stemming from the Japanese tsunami). That is, while spending on goods grew only modestly, spending on services surged 2.0% in the quarter, and is now growing at an annual rate of 5.5%, its highest rate since early 2008.

This was the fastest quarterly growth in consumer spending since mid 2010, and before that 2007. The outcome reinforces our view that a structural shift is occurring in spending patterns. After growing their spending on retail goods at a very strong rate through the last decade, households are now spending an increasing proportion of their income on services like holidays.

This also supports our view that the monthly retail sales numbers - which continue to exert a strong influence on financial markets - are no longer a good guide to overall consumer spending.

It also makes us wonder about the link between consumer sentiment and spending, which our past research has shown is not a consistent predictor of consumption.

Note that the pick-up in spending went hand-in-hand with a high saving rate, which was 10.5% in the quarter, as household income continues to grow very strongly, up 5% over the past year after inflation."