There's no denying the economy has slowed down, by far more than we were expecting. But don't conclude it's likely to subside into recession any time soon.
This week's national accounts for the March quarter, from the Australian Bureau of Statistics, show real gross domestic product grew by a pathetic 0.3 per cent during the quarter, and by just 1.7 per cent over the year to March. This compares with its "potential" annual growth rate of 2.75 per cent.
This time last year, the government's budget forecast was for growth averaging 2.5 per cent in the financial year just ending, accelerating to 3 per cent in the coming year.
So what's gone wrong? And why is it unlikely get a lot worse?
First point: don't think the economy's running down like a battery-powered toy. Looking back over the past four quarters, we see OK growth of 0.7 per cent in the June quarter of last year, then a contraction of 0.4 per cent, then super-strong growth of 1.1 per cent and now weak growth of 0.3 per cent.
This unnatural, saw-tooth pattern says some transactions may have been recognised in the wrong quarter. For instance, investment spending by federal and state public corporations leapt by 37.8 per cent in the December quarter, but then contracted by 20.9 per cent in the March quarter.
Neither figure should be taken literally.
Two major drivers of activity at present are home building and exports of coal and iron ore. Both have been disrupted by unusual weather that's not been smoothed away by normal seasonal adjustment. Climate change?
Home building has been growing strongly for several years, but it contracted by 1.2 per cent in September quarter and by 4.4 per cent in the March quarter. Most of this is explained by unusually wet weather in some parts of the country.
The volume (quantity) of exports was up 2 per cent in the June quarter, then slowed to growth of 1.4 per cent, then leapt by 3.7 per cent and now has actually fallen by 1.6 per cent.
Much of this volatility is explained by extreme weather disrupting shipping carrying coal from Queensland or iron ore from Western Australia.
We could expect the figures for the present quarter to be boosted by a catch-up from the weak March quarter – were it not for the further disruption in April and May we know has been caused by Cyclone Debbie.
Note that a sudden build-up in business inventories contributed 0.4 percentage points to growth in the March quarter. Much of this was a jump in mining industry stockpiles, suggesting a lot of coal was produced, but couldn't be shipped.
But to explain much of the quarter-to-quarter volatility in GDP growth in terms of misallocation and wild weather doesn't alter the fact that, when you add up the four quarters, you get only to utterly weak annual growth of 1.7 per cent.
One major component of growth that's unlikely to be affected by either factor is consumer spending. It's been unusually weak in all quarters bar December, growing by a pathetic 1.3 per cent over the year to March.
And this despite households cutting back their rate of saving from 6.9 per cent of household income to 4.7 per cent over the year.
This weakness in consumption ain't hard to explain: growth in household income has been held back by weak growth in employment and, more particularly, negligible growth in real wages, notwithstanding a 1.2 per cent improvement in the productivity of labour over the year.
Real labour costs per unit – a measure of the race between real wages and labour productivity – fell 1.7 per cent in the quarter and 6.3 per cent over the year to March.
Wanna know why the economy's growth is so weak? You won't find a more powerful explanation than that.
Remember, however, that the weakness isn't spread equally across the country.
State final demand is a poor substitute for gross state product, but the best we get each quarter. Across the whole economy, domestic final demand also grew by 1.7 per cent over the year to March.
But state final demand grew by 4.5 per cent in Victoria, 3.3 per cent in South Australia and Tassie, an above-par 1.9 per cent in NSW, and a below-par 1.6 per cent in Queensland.
Now get this: in Western Australia, final demand contracted by 6.6 per cent. So the West is still bearing the brunt of the bust in the mining construction boom. This explains a fair bit of the weakness in the national average.
The West's contraction in the March quarter was just 0.2 per cent, however, suggesting the inevitable end to its contraction phase isn't far off. That's the first reason things won't continue weakening nationwide.
As part of that, the long-running fall in mining investment spending must also be within a few quarters of ending. You need to be good at arithmetic to see that, when our focus is on rates of growth, "the removal of a negative is a positive".
The housing construction boom has a few more quarters to run, and strong grow in infrastructure spending is in the pipeline.
But much depends on what happens to real wages. Certainly, the government's forecast of economic growth returning to our potential growth rate of 2.75 per cent in 2017-18 as a whole, rests heavily on a resumption of real growth in wages.
To the extent the present weakness in wage growth is merely cyclical, wages will recover soon enough. This is hardly the wildly optimistic expectation that some, who've forgotten the economy moves in cycles, have claimed.
But to the presently unknown extent that the weakness in wage growth has deeper, structural causes, we won't get back to a decent rate of growth until the government acts to fix the problem.
