There has been much interest in this week’s Australian GDP data, with many waiting to hear whether GDP growth for the first quarter of 2009 was negative, pushing Australia “officially” into recession? Well, yesterday it was announced that GDP was up 0.4% for the first quarter of 2009, after a fall of 0.6% in the December quarter. Does that mean Australia has averted a recession? Based on the technical definition that two consecutive quarters of falling GDP makes a recession, yes Australia has avoided recession, for now.
What are the key points that investors need to know about:
• Let’s face it, a more sensible look at the numbers tells us what we already know; the economy is in recession.
• Domestic demand has fallen 2.3% over the last two quarters and this sits against a 4.1% fall in the OECD area GDP over the same period. Like offshore countries, the unemployment rate has jumped up, but Australia has clearly weathered the storm comparatively better.
• Business investment detracted 1.1% from growth.
• A thumping 2.2% contribution from net exports helped get the GDP number into positive territory.
Does the GDP Data Really Change Anything?
Not really. Massive monetary and fiscal stimulus has been applied and has cushioned the economy to a certain extent, with the boost from net exports unlikely to be sustained.
What Does this Mean for the Sharemarket?
In a previous edition of Perennial Perspective, I pointed out that historically equity markets often perform well while the economy stays in recession. This time appears to be no different. Equity markets are forward looking and there are signs that the interest rate sensitive sectors of the economy, like housing, are turning around. The Reserve Bank of Australia (RBA) is ready to step in with further monetary easing if required.
The overall economic story behind the headline GDP number is pretty much as expected. Business investment is retreating sharply, the consumer is subdued, the pick up in housing approvals has yet to appear in the GDP data and the public sector is expected to boost growth, but this hasn’t shown up in the data yet. Remember, it is not over yet. June and September quarter GDP readings could easily be negative before a more sustained recovery late this year.
Leading Indicators Stop Bleeding
May continued a very important trend around the globe, with many significant indicators starting to trend up, particularly towards the end of the month, These included:
In the US
• The ISM manufacturing index rose to 42.8%
• The New Orders Index increased to 51.1%, the first time above 50% since November 2007 (a reading of 50% or greater in these indices indicates an expansion)
• Consumer confidence rose dramatically to an eight month high (off a very low base)
• China’s official PMI stayed above the 50% mark at 53.1%, slightly down from April
• Retail sales were above expectation
This is all great news and the global economy looks like recovering in the next 12 months. However, investors should remember that these indicators are in most cases coming off extremely low levels and partly show the normal re-stocking phase, as businesses start to re-build inventories after having factored in a very negative sales environment.
The key questions for investors are:
• What will we see after businesses have restocked?
• Will these positive trends continue to improve as quickly over the next few months?
With that in mind, markets may need to take a breath before the next phase of what is hopefully a sustainable bull market.
Source: Perennial Investment Partners