Fed: Forecasting GDP has become that bit harder this time around

AAP General News (Australia)
12-11-2009
Fed: Forecasting GDP has become that bit harder this time around

By Colin Brinsden, Economics Correspondent

CANBERRA, Dec 11 AAP - Trying to forecast next week's gross domestic product (GDP)
has become a bit of a stab in the dark.

Not only have the components of GDP in the past few weeks been all over the shop, the
Australian Bureau of Statistics (ABS) is introducing new international accounting standards
for the national accounts.

That's why the September quarter report has been delayed until next Wednesday, rather
than its usual release time of the first Wednesday in December.

It means the data history for the series will be revised, and of course, if you don't
know your starting point, it's difficult to gauge where you are going.

What we do know is that consumer demand was soft in the three months to September,
home building has improved, business investment remains weak and government spending has
been strong, especially construction.

Also there has been a surprise jump in business inventories, while exports have slumped
unexpectedly, albeit due to falling commodity prices rather than the volume of goods being
shipped abroad.

Commonwealth Bank economist Michael Blythe's best guess is that GDP rose 0.3 per cent
in the September quarter, keeping the annual rate at 0.6 per cent.

That's not a startling growth figure, but still a positive number nonetheless given
what has happened in other parts of the world.

Mr Blythe says the September quarter was always going to be soft.

"That's because a lot of the stimulus that kept things afloat in the first part of
the year was going to unwind," he told AAP.

The impact of the government's cash handouts has passed, and the more generous first
homeowners grant has been scaled back.

The business tax allowance also brought forward investment spending before the end
of the tax year in June, so that boost will drop out the September quarter reading.

"A weak number was always expected, but more to do with that policy fade aspect rather
than suggesting the economy was turning down again," Mr Blythe said.

But it is still a mystery why business inventories - stock in warehouses and on shelves
- will be adding substantially to growth, at least 1.5 percentage points.

As Mr Blythe points out, it's hard to imagine that companies would have been that positive
in May and June, when the decision to lift their stocks would have been made, given the
outlook was still all doom and gloom at the time.

But wait, there is yet another twist in trying to estimate the September quarter GDP.

And one that usually goes by without much attention.

The ABS normally tries to rationalise anomalies in the GDP series during the September
quarter, aided with better information on say income tax returns and population growth.

However, the impact from global downturn, and the policy decisions responding to it,
appears to have created larger anomalies in the data than usual.

For example, Mr Blythe says while the expenditure figure of GDP rose by 2.9 per cent
in the year to June, the production figure fell by 0.7 per cent.

"So one is saying the economy was running towards trend, the other is saying we had
a full blown on recession in the past year," he said.

He said once a year the ABS tries to rationalise these figures.

"Of course you don't know exactly how that will play out. Revise up the weak bits,
or revise down the strong bits, or some combination of the two," he said.

It makes you want to throw your abacus out of the window with despair.

But one thing is clear from this complex web of conflicting numbers, it isn't going
to alter the course of interest rates.

After all, this data is almost three months old, and a rear-view mirror of where we
have been, rather than where we are going.

Unless of course the national accounts point to us being in a deep recession and we
don't know it.

But that is highly unlikely given more up-to-date numbers.

Thursday's labour force numbers are a case in point.

The unemployment rate fell unexpectedly to 5.7 per cent in November as more than 30,000
jobs were created, meaning that nearly 100,000 workers have joined the labour market in
the past three months.

Hardly the stuff of a recession. More like a boom.

It means that it looks increasingly likely that the jobless rate is peaking, having
shifted between 5.7 per cent and 5.8 per cent for seven months.

Even if the rate eventually does breach six per cent, economists doubt that it would
stay there very long.

It also means that the Reserve Bank has kept faith with its normal strategy of only
raising interest rates when there is a peak in unemployment, even if it was coincidental
in this case.

The surprisingly strong jobs report will probably see the Reserve Bank raise the cash
rate for a fourth time when its board next meets in February.

Money markets are pricing in a greater than 70 per cent chance of a 25 basis point
rate hike at the meeting, lifting the cash rate to 4.0 per cent from 3.25 per cent.

Central bank governor Glenn Stevens confessed this week that looking back to the beginning
of the year he would not have expected to be raising interest rates 12 months later.

"I think at the beginning of the year, was I expecting to have the economy looking
as good as it does?," he said addressing a forum of economists.

"I said we were in recession so I felt that things were going to turn out rather worse
than they have, but who's complaining? Not me."

Borrowers may not be so happy, but you get the governor's drift.

It could of all been so much more uglier.

AAP cb/rl/cjb/mn

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