Working Papers

By How Much Did the Australian Economy Outperform?

Updating our earlier model of Australian GDP growth for yesterday’s data revisions yields a forecast for the March quarter of -0.5% q/q compared to an actual result of 0.4% q/q.  So growth was 0.9 percentage points stronger than a forecast based solely on US GDP growth.  This outperformance is even larger if we believe the expenditure measure of GDP (1.1% q/q), but turns into underperformance if we believe the conceptually equivalent production measure, which came in at -0.9% q/q.

Of all the country-specific factors that might account for this outperformance, discretionary fiscal policy is likely to have been the least of them.

posted on 04 June 2009 by skirchner in Economics, Financial Markets, Fiscal Policy

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Apparently Gerard Minack explains the +ve GDP result on the basis that the ABS changed the timing of adjustments to commodity prices in the national accounts:
“Usually the Bureau waits for the major contracts to be settled, and factors in the price changes in the June quarter (because the contract prices are set from 1 April). Yesterday it announced that it was actually factoring in lower prices in the March quarter. Factoring in a lower price implied a higher volume for exports, which lifted GDP.”

Posted by .(JavaScript must be enabled to view this email address)  on  06/04  at  02:54 PM

Export volumes for both coal and iron ore to China have in fact been very strong.

As I noted in the article below, it’s volumes that matter for GDP growth, not prices, which is why the decline in commodity prices is not all bad news, especially if it reflects increased supply.


Posted by skirchner  on  06/04  at  04:49 PM

But it sounds like Minack is saying that the March qtr GDP was artifically (or at least prematurely) boosted by an earlier price change (and hence an earlier implied volume change) than in the past. The upshot may be a higher March qtr GDP and lower June qtr GDP than would have otherwise been the case.

Posted by .(JavaScript must be enabled to view this email address)  on  06/04  at  04:54 PM

That may well be the case, but the effect (and intent) of the change would be to smooth the data over the two quarters.  Timing issues aside, it looks like volumes are holding up remarkably well.

I have an op-ed out soon which makes the point that it is interest rates and asset prices and not trade in goods and services that is the main transmission mechanism from world to Australian growth.

Posted by skirchner  on  06/04  at  05:14 PM

Minack rules.  Thank God he was awake with all the cheerleading that went on yesterday.

it’s volumes that matter for GDP growth, not prices

Yeah, but surely its prices times volumes that really matter?

Did you look at the income numbers in the national accounts?

Real gross domestic income: Q4: –1.3, Q1: –1.4
Real gross national income: Q4: –1.2, Q1: –1.2

it looks like volumes are holding up remarkably well.

For iron ore maybe, but not much else.  The Q1 BoP report on Tuesday said:

In seasonally adjusted terms at current prices, goods credits fell $6,297m (10%) to $59,241m.

Exports of non-rural goods, in seasonally adjusted terms at current prices, fell $8,109m (15%) to $44,835m, with volumes down 1% and prices down 14%

Coal, coke and briquettes, down $5,309m (29%), with volumes down 13% and prices down 19%

The only “good” news was:
Partly offsetting these decreases was the metal ores and minerals component, up $316m (2%) with volumes up 7% and prices down 4%

And I reckon a fair chunk of that was Chinese stockpiling.

Now consider that the AUD is up 27% since March, prices will fall further in USD terms thanks to new contracts, our big coal customers (Japan, Korea, Taiwan) are in a near depression, the Chinese steel industry is in the doldrums and there’s a mountain of iron ore sitting at Chinese ports.

Does that add up to booming export income in Q2 and Q3?

Posted by .(JavaScript must be enabled to view this email address)  on  06/04  at  10:24 PM

Interesting tidbit on China’s iron ore stockpiling and steel industry woes: Ore to China not driven by demand
THE record iron ore exports to China that helped Australia dodge a recession have been driven by speculation and anticipation of demand by steelmakers that has not yet eventuated - and volumes, as well as prices, are likely to fall in the second half of the year.

The future of 100 million tonnes of iron ore sitting in Chinese ports, steel mills and warehouses will be critical in determining how much Australian iron ore China needs.

Experts says much of the surge in Chinese iron ore imports has been driven by traders, rather than steelmills, during uncertainty over the new contract prices for iron ore. Talks to set the annual price Chinese steelmills will pay for Australian ore were supposed to end in April but have been beset with more brinkmanship than normal this year, and continue to drag on.

Domestic demand for steel in China remains weak, and speculation is rising that Beijing, which is already spending hundreds of millions of dollars to stimulate the economy, may have to step in to address the situation


“The volumes in the ports and in stock are now far beyond those that are needed for production, so the volumes that are coming into China are sure to slow down in the second half of the year,” Custeel.com analyst Fu Yao said.

Huiquan Cao, president of Fortescue Metals Group investor Hunan Valin, said the record Chinese import volumes had been driven by speculation rather than demand, due to the uncertainty of the price negotiations and promised government spending on infrastructure.

“If you look into the figures, most of the buyers are not the steel mills,” Mr Huiquan told The Australian yesterday. “The spot price has been moving up and down significantly, which has influenced traders’ behaviour ... in my opinion many traders and some steel mills will try to make a bet on the market.”

Posted by .(JavaScript must be enabled to view this email address)  on  06/04  at  11:32 PM

Here is the ABS response to Minack:


Posted by skirchner  on  06/05  at  03:39 PM


Posted by .(JavaScript must be enabled to view this email address)  on  06/05  at  03:45 PM

The ABS says:
The reference year prices are updated annually, in the September quarter accounts. For example, the September quarter 2009 accounts will use average prices reported in 2007-08.

Er, so rather than revise down prices in March, the ABS will revise up prices to 2007-08 levels in September?  How does that bear any relationship to reality?

Bill Evans says:
Australia’s national accounts for the March quarter emphasise how difficult it has become for the authorities to assess Australia’s current economic performance. There are three large distortive forces – the collapse in AUD and commodity prices in the second half of 2008 which has made it difficult for the statistician to calculate trade volumes from nominal data (note the 3.9ppt’s contribution to GDP growth from net exports over the last two quarters). Imports are estimated to have collapsed by nearly 15 per cent while final demand slowed by only around 1 per cent – very suspicious indeed!

Is Bill Evans wrong too?

Posted by .(JavaScript must be enabled to view this email address)  on  06/06  at  09:56 PM

Minack’s response to the ABS:

In my comment last week on the Australian GDP report I said that the ABS (Australian Bureau of Statistics) had changed the way it tracked bulk commodity price exports.  It had not.

Sorry: this shows the perils of doing something on-the-run while overseas, compounded by me misreading some third-party comments.

No excuses, it was sloppy by me.  The Bureau, rightly, gave me quite a spanking:


As an aside, my mistake doesn’t change the conclusions in my original comments.

Apologies to all.

More on our fabulous export performance, found in <a >Stutchbury’s column</a>:

Australia is still being drawn into the deepest global downturn in generations. We’ve done relatively better so far in part because of momentum from the China boom that has now burst. This is only now catching up with us, in the form of the 35per cent cut in iron ore contract prices backdated to April 1. Coal prices are down between 40 per cent and almost 60 per cent. Pretty quickly, says Ed Shann, a former top Canberra econocrat and Access Economics co-founder, this will show up as a big national pay cut.

Shann says per capita national income could fall 10 per cent in real terms in 2009 and 2010 based on International Monetary Fund and Reserve Bank forecasts for economic growth and the terms of trade (the ratio of export prices to import prices). That would more than double the hit to other advanced economies, reflecting Australia’s reliance on commodity exports.

Posted by .(JavaScript must be enabled to view this email address)  on  06/10  at  05:38 PM

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