Australian GDP

There are two ways to view Australia’s quarterly rise in gross domestic product, revealed to a largely incredulous world on Wednesday. The glass-half-empty reading is that Australia, far from being different from the rest of the globe, is merely lagging it. As the year goes on its insulating factors – the long-tail commodities boom, and aggressive, upfront policy action – will start to fade.

But there is another possible scenario – one in which policy gains traction and, helped by Asia, Australia escapes with just one quarter of falling output. That would mirror America’s experience in 2001-02, when aggressive monetary and fiscal stimulus averted a downturn. But in the pungent phrase of Morgan Stanley strategist Gerard Minack, that turned out to be “Homer Simpson policy-making.” Faced with a crisis caused by leverage and inflated asset prices, the Fed’s actions led to more debt, more over-valued assets and a bigger eventual crash

Australia has yet to fall out of love with credit. The Reserve Bank has cut 425 basis points from the cash rate since September, bringing it to a 49-year low; the government has handed out A$12bn of money it doesn’t have. House prices have swayed, but housing credit demand hasn’t; over the year to April, it rose by more than 7 per cent. While US consumers are urgently repairing balance sheets – the personal savings rate hit 5.7 per cent in April, from zero a year ago – Australia’s aren’t. Consumer spending grew 0.6 per cent from the fourth quarter; savings fell. Yet household debt, almost equal to GDP, is at levels comparable to the most credit-drenched economies in the world.

Glass-half-full types should recall Mr Simpson’s circular logic: “Beer is the cause of, and solution to, all of life’s problems.” A debt problem solved by debt is simply storing up trouble.

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