The last three months of 2017 were yet another quarter of weak growth in the economy. Fortunately, however, they weren't as weak as we've been led to believe.
According to the national accounts, issued this week by the Australian Bureau of Statistics, real gross domestic product grew by 0.7 per cent in the previous quarter, but slowed to 0.4 per cent in the December quarter.
This caused the annual rate of growth to slump from 2.9 per cent to 2.4 per cent.
Trouble is, the sudden slowdown is largely the product of quarter-to-quarter volatility, caused by one-off factors and unexplained "noise" in the figures – noise that stops you hearing the signal those figures are trying to send.
This is why the bureau also publishes "trend" or smoothed figures, which reduce the noise and make it easier to hear the underlying signal.
The trend figures show the economy growing at a fairly steady rate of 0.6 per cent a quarter, and by 2.6 per cent over the year to December.
This is likely to be closer to the truth, though it's still weaker than we've been hoping for, especially since employment grew by a remarkably strong 3.3 per cent during 2017 – almost 400,000 more souls.
How can the economy's production of goods and services grow by only 2.6 per cent when the number of people employed to produce those goods and services has grown by 3.3 per cent?
Over a period of more than a few years, it can't. But over shorter periods it's surprisingly common for the standard relationships between economic variables not to show up in the figures. Why? In a word: noise. (And noise not even statistical smoothing can penetrate.)
Note, however, that for as long as employment is growing faster than production, the productivity of labour will be falling, just as a matter of arithmetic. If you think employment growth is a good thing, this temporary fall in productivity is nothing to worry about.
To emphasise how weak quarterly growth averaging 0.6 per cent is, consider this. Growth in GDP per person is averaging only about 0.2 per cent a quarter.
This gives annual growth in GDP per person of 1 per cent. (Huh? Four quarters of about 0.2 per cent adds up to 1 per cent? Yes. You can't just add 'em up, you have to allow for compounding - otherwise known as "interest on the interest", as in compound interest.)
To have GDP growth of 2.6 per cent, but growth per person of only 1 per cent, is a reminder of how fast our population is growing, and how much of our growth (almost invariably faster than the growth rates of those rich countries whose populations aren't growing much) comes merely from population growth – a point every economist knows, but few bother pointing out to the uninitiated.
And don't hold your breath waiting for any treasurer to point it out. To those guys, a big number is a big number – and what's more, it's solely the result of our government's wonderful policies.
But back to the reasons this week's news of further weak growth isn't as bad as it sounds.
The first is that annual growth of 2.6 per cent isn't a lot lower that our estimated "potential" (medium-term average) rate of growth of 2¾ per cent.
It's true, however, that we've been growing at below our non-inflationary potential rate for so many years we've acquired such a lot of spare production capacity (including unemployed and under-employed workers) – such a big "output gap", in econospeak - that we could and should be growing a fair bit faster than that medium-term speed limit of 2¾ per cent, until the spare capacity's used up.
Another indication things aren't a bad as they've been painted is Reserve Bank governor Dr Philip Lowe's statement that this week's figures give him no reason to revise down the Reserve's forecast that growth will strengthen to 3 per cent this year and next.
Why so confident? Because when you look into the detail of this week's results, you see more signs of strength than weakness. (From here on I'll switch to quoting the unsmoothed figures favoured by those who prefer the exciting confusion of noise to the boring wisdom of signal.)
First point is that "domestic demand" (gross national expenditure) grew over the year at the healthy rate of 3 per cent, meaning it was a fall in "net external demand" (exports minus imports) that caused growth in aggregate (domestic plus external) demand to be only 2.4 per cent.
The fall in the volume of "net exports" (exports minus imports) was caused mainly by a fall in exports, but there's little reason to believe this was due to anything other than temporary factors.
Turning to the biggest components of domestic demand, we've been worried that consumer spending wasn't growing strongly because of the lack of growth in real wages. But this week's figures show consumer spending growing by 1 per cent during the quarter and a healthy 2.9 per cent over the year.
Quarterly growth of 1 per cent won't be sustained, but an upward revision to the previous quarter's growth adds to confidence that household consumption is stronger than we'd believed.
All the increased employment is boosting household income, even if real wage growth isn't.
Business investment in new equipment and structures fell by 1 per cent in the quarter, but this was explained by another fall in mining investment (which falls are close to ending) concealing stronger than expected growth in non-mining investment (as estimated by Treasury) of 2.1 per cent in the quarter and 12.4 per cent over the year.
As Paul Bloxham, of the HSBC bank, summarises, "the key drivers of domestic demand – household consumption and non-mining business investment – were strong, and should drive a lift in overall growth in 2018".
