Economy in a coma thanks to climate, Trump and the election

The March quarter national accounts from the Australian Bureau of Statistics are a study in how external factors can affect GDP growth. And in affecting GDP growth, productivity takes a hammering, too — in ways that no policymaker can ever control.

Three external factors hammered the economy in the March quarter, which grew by only 0.2%.

One was Mad King Donald and the chaos he unleashed, sending a signal to the world that difficult times are ahead, not merely for the world’s biggest economy, but for the rest of us.

The second was Tropical Cyclone Alfred and other weather events, which had direct impacts on ordinary Australians and also harmed exports. “Coal and LNG exports were heavily impacted by severe weather disruptions to production and shipping,” the ABS said. That flows through into poorer productivity outcomes. And don’t forget there’s a drought in South Australia, Victoria and northern Tasmania that’s also affecting agricultural production from those regions.

In fact, drought is one of the biggest productivity killers in the Australian economy. Economists often remove agriculture from productivity data in order to get a clearer, non-weather-related picture of what’s happening.

And get used to climate events reducing economic growth and productivity. Anthony Albanese and co. can pretend that Australia’s massive fossil fuel exports aren’t our problem, but they come back to bite us, hard, in more cyclones, droughts and floods. This current quarter is likely to also see reduced growth due to the impact of flooding in northern NSW, to the extent that isn’t offset by government assistance to victims.

Lovely cycle, isn’t it? Australia sends off fossil fuel exports — we’re one of the biggest carbon exporters in the world — that add to GDP, then we cop the extreme weather events we’re facilitating through higher carbon emissions, which lower growth, then governments pump money into the economy via victims of weather events. Meanwhile, fossil fuel exporters pay next to no tax on gas exports.

The third impact was the uncertainty created by the federal election — which was pushed back by Alfred — with the outcome not resolved until May 3. A lot of business investment, particularly in areas like renewable energy (that the Coalition wanted to halt), would have been on hold waiting for the election to be over.

You could perhaps add a fourth factor — the ongoing, huge impact of the Reserve Bank’s war on households, which it should have begun pulling back at the end of 2024. Instead, it waited until February for a belated first rate cut. Now, the RBA will be in a bigger rush to get rates down — even Warren “Lift the Rates” Hogan thinks the RBA should cut rates by more than normal.

Public investment did fall in the second quarter — but from record levels. Government support for the economy is still high — after all, the federal government is still spending a significant budget deficit this year. But private investment picked up — unhappily for the galahs at the Financial Reviewwho constantly lament that the government is spending too much on caring services and not cutting the company tax rate to encourage investment.

“Private investment rose 0.7% in the March quarter led by investment in dwellings, new buildings and new engineering construction,” the ABS said. “Investment in both houses and alterations and additions grew this quarter, in line with recent increases in approvals. Non-dwelling construction also rose in the March quarter, with investment in mining and manufacturing projects driving growth. Investment in electricity generation and distribution projects continued. There was an offsetting drop in machinery and equipment investment.”

The overall 0.2% result is further evidence that the government, for all its many and significant faults, made the right call to take the budget into deficit this year, even if its broader fiscal stance of long-term deficits is fiscally reckless.

Without that support from the government — and its support for minimum wage rises for Australia’s lowest paid workers, which will again support growth in the second half of this year — the economy likely would have plunged into negative growth in the March quarter, and perhaps face a second consecutive negative quarter now.