GDP Day…Expect the worst, hope for the best

Today we all expect Q1 GDP to be confirmed as the worst outcome since the “recession we had to have” back in the early 1990’s. It will be no surprise to market commentators and players but how it plays in the Main Stream Media could further weaken the growth profile as it is likely to feed on and heighten household concerns about debt, making ends meet and even employment.

But GDP data is a notoriously volatile number. That may sound strange given that it is always so old (insofar as that we are today June 1st getting the outcome of the quarter ended two months ago) and that we have so many partial indicators. But the market often gets it wrong because there are always rogue components in there.

Remember the GDP equation runs as follows:

  • GDP = C + I + G + (X-M)
  • C is consumption
  • I is investment
  • G is government and
  • (X-M) is net exports – the value of what we sold minus what we bought

Each of these components has a myriad of sub components but essentially there is you equation.

But you can see here where the conundrum for the RBA lies

  • C is about 54% of the economy and weak
  • I is about 22% of the economy and the Capex survey and the RBA tell us there is a boom on
  • G is about 24% of the economy and still running a deficit, so adding spending to the economy and
  • (X-M) is about 0% of the economy (this moves obviously depending on trade) and while negative for this quarter expected to rebound

So its 54% in doldrums versus 46% adding, or expected to be adding to the economy. You can see their dilemma given they hold the long term view on Chindia and the mining boom. As we noted yesterday we reckon with a medium term time frame and with all the headwinds in the global and crucially domestic economy they can wait and see what eventuate.

Even if they are worried about inflation they can pop two hikes in a row and slow things quickly later this year if it gets out of hand. But if they hike once or even twice soon without seeing just how weak this consumer economy is they risk a tipping point that only much much lower rates would cure. So the risk lies not with waiting but with tightening in our view.

BTW: I’ve done a piece over at MacroBusiness extrapolating on my thoughts from yesterday of the compact between the RBA and the Australian population. I think its worth a read.

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