It seems that many financial journalists and commentators have decided that Australia has escaped a recession, and that the economy is doing just fine now based on the June Quarter GDP figures that have just been released. But I wonder how many of them looked into the GDP data in detail and spotted the warning signs?
On the surface the fact that Australia’s GDP grew by 0.6% (seasonally adjusted) shows that the economy is holding up well while other developed economies have experienced sharp economic contractions and are struggling to move out of a recession.
But as I have mentioned before, the only reason Australia has escaped a technical recession so far is that we don’t export a lot of manufactured goods and our mining exports have held up really well. We can thank our geography & geology for the mining exports, not our economists and elected officials.
If you look into the Australian National Accounts: National Income, Expenditure and Product, June 2009 as released by the ABS yesterday you will find some charts and comments that don’t seem to get much media coverage.
Firstly let’s look at some growth trends.
Selected Industries Contribution to growth
(Jun 08 to Jun 09: Trend)
The chart above shows the changes in growth trend for some selected industries and what is a little worrying is that mining is trending in the wrong direction. We all know that prices for iron ore & coal have fallen so this is going to of course hit export earnings, but I suspect we have yet to see iron ore export volumes hit a low and thus the mining sector may still be trending in the negative direction when the next quarterly GDP figures are released.
As you can see the manufacturing sector is also contracting and the only reason the impact is not as severe on our GDP as other nations is that we don’t manufacture much relative to other developed economies. Nothing to boast about I would think.
Overall the GDP data shows the economy is holding up quite well, but as an investor I don’t like to see retail spending growing and mining exports shrinking.
So although there is much to be pleased about in the overall GDP growth figures we need to be aware that not everything is trending in the right direction. The Government and the Reserve Bank are betting on the economy continuing to strengthen from this point onwards, however I remain more cautious and feel we may not have seen the last quarter of GDP contraction yet.
Next let’s have a look at how companies are doing.
Gross Operating Share (GOS)of Corporations
The GOS in simple terms means company profits (not exactly, but close enough when just looking at trends) and as we can see Australian companies have seen their profits fall after peaking in 2007-2008.
What is of interest for investors is that the GOS is now trending down towards levels first seen around June 2005 and at that time the ASX All Ordinaries Index was at approximately the same level as it now. Spooky!
Company profits will probably creep up a little next quarter, but I doubt they will bounce back strongly and hence the reason I keep talking about the 4800-5000 level on the All Ords/ASX 200 as being the level I expect stocks to get to, but then have a very difficult time breaking through this year.
Remember Australian companies may have to face over the next 6-12 months higher interest rates, higher oil prices and the extra costs associated with the introduction of the Emissions Trading Scheme. (ETS) Therefore it is not going to be easy for companies to increase profits until several major economies are growing strongly again, not just China.
Finally we should pay attention to this comment that accompanied the GDP figures released by the ABS:
“Export prices decreased by 16.3% during the quarter and have decreased 8.0% through the year. Import prices decreased by 8.1% during June quarter and were up 4.4% through the year.”
I did not see one commentator in the mainstream media yesterday pick up on this and it is certainly not a trend we want to see continuing. If export prices fall or even remain flat while import prices rise this is is going to play havoc with our balance of trade and make it hard for the government to pay down debt.
Yes the Australian GDP number do show our economy is holding up better than many other major economies, but the global economic downturn is still a work in progress. Let’s keep the champagne off the ice for now for the path to economic recovery is likely to be a long one.