The 'green shoots' to look out for
As the most recent retail sales data for May highlights, the first element of the Commonwealth Government’s fiscal stimulus has provided short term success. The Australian economy has been held out of recession with the cash handouts playing a major role in this. In addition, with the retail sector being the largest employer, the Government’s strategy of providing immediate support for retailing has helped avoid any major increase in unemployment.
Still difficult times ahead
However, the impact of the cash handouts is, by design, short term in nature. All else being equal, when the program of cash handouts ends, there will be a detraction in retail sales, creating a negative impact on economic growth and employment. While the Government has a plan for providing further net stimulus to the economy, the bulk of this is to be via infrastructure spending (eg building and maintenance work on schools, transport and hospitals). This will have a much more gradual and measured impact on the economy.
Recent trade data has also highlighted the inevitability of falling export incomes detracting from economic growth. While the fall in the Australian dollar over the course of 2008 helped delay the impact of weaker exports, the magnitude of the slowdown in the global economy and the fall in commodity prices is now starting to be reflected in what Australia is earning from its exports. In May this year, export income was nearly one-third lower than the peak level late in 2008.
A stronger currency in 2009 only adds to the challenges ahead for our exporters.
Hence with the growth in retail sales set to ultimately wane and export receipts likely to decline further, the Australian economy needs its own sources of new growth or “green shoots” if it is to continue to record such impressive rates of domestic growth and employment.
Where the green shoots may come from
Three potential sources of new economic growth or stimulus over the next 12 months are:
- a turn around in the business inventory cycle
- a pick up in residential housing construction
- further growth in motor vehicle sales.
Business inventories
One characteristic of the pattern of economic activity in Australia over the past 6 months, has been a significant fall in inventories or stocks (ie items produced but not yet sold). The extent of the decline in inventories can be seen on the following chart:
The fall in inventories could reflect the fact that businesses are preparing for a weaker period of demand ahead, or it may also be indicative of past demand in the economy being ahead of that expected. Either way, the good news about having been through a period of sharp decline in inventories is that it can’t continue much further and there is a high likelihood that it will be reversed at some point. The production associated with any rise in inventories or re-stocking feeds directly into economic growth. A reversal of the previous 2 quarters of run down in inventories would add 2.5% directly to economic output.
Residential construction and motor vehicles
One of the benefits of the Australian economy entering the Global Financial Crisis with relatively high interest rates was that certain cyclical parts of the economy had already moved well into a downturn phase ahead of the crisis. This avoided a boom-bust styled outcome. Residential housing construction and motor vehicle sales have been operating at levels below longer-term averages for an extended period of time.
Ultimately, the increased demand for housing and motor vehicles will see activity in these sectors rise. Both are placed in the “needs” rather than “wants” categories of expenditure. With low interest rates, an avoidance of significant unemployment, and some directly targeted Government assistance, the environment would appear to be favourable for a cyclical recovery in both industries. Some early signs of renewed activity have already been cited in recent data.
The ongoing growth of the domestic “green shoots” highlighted above provides some hope that the Australian economy can continue to expand, without necessarily waiting for an eventual recovery in the global economy.