I must be one of the few people who interpreted Australia's recent GDP growth as a warning sign rather than a positive return to 'trend'. Sure, on the surface 3.3% YoY GDP growth (1.2% in the June quarter) looks impressive, but it loses its gloss when we examine what contributed to this 'growth'.

The four main contributors to growth were: government spending; household consumption; dwelling investment; and net exports. Let's take a look at each one of these 'positives':

Government Spending

Government spending, while increasing GDP, does not add anything productive or generate any wealth in the economy. It merely delays the necessary restructuring process and in fact further distorts it, allocating resources to areas determined by bureaucratic decree rather than market forces (consumers). Real income can only be increased by working harder or more efficiently, saving more, investing more, and producing more. Government spending detracts from all of those requirements. Thus, the 'positive' contribution to GDP by government spending is, on the contrary, a negative for future growth prospects in Australia.

Household Consumption

Consumption spending was the largest contributor to GDP growth, supported by a decline in the savings rate and heavy discounting by retailers desperate to offload inventories in this environment. Prey, how is a further decline in savings and more consumption a positive for the economy? It is real savings that are the only road to prosperity. Consumption is nothing but a destroyer of wealth and, while essential (why work productively if you cannot reward yourself?), should not be praised as a driver of 'growth'. It should be recognised for what it is, a consumption of scarce resources that generates zero wealth and generates no real income to the economy. This, like government spending, should be recorded as a negative for future growth prospects and not something to celebrate in a time when Australians are heavily indebted and consuming above their means.

Dwelling Investment

Housing, like the above two 'investments', cannot increase the wealth of a nation in and of itself. It is consumption, albeit more distant consumption, and not a generator of wealth. While it can enable wealth generating activities (people need a place to live so they do not die!) and while it may generate income for it's proprietor, it adds nothing to the revenue of the nation as a whole. To quote Adam Smith, ..."revenue, however, which is derived from such things [housing] must always be ultimately drawn from some other source of revenue." More consumption spending in the ponzi-scheme that is Australian dwelling investment is NOT something that should be celebrated!

Net Exports

This is the only positive to come from the recent data and I remain skeptical as to how long it can continue. All of the above 'positive' contributors to GDP must, by their very nature, derive their revenue from 'true' production, which in Australia's case is resources. Australia is a resource-rich, commodity based economy that has so far avoided the resources 'curse' by following five steps to success (relative to countries that have fallen into the resources trap): (1) low taxes; (2) balanced budgets; (3) free trade; (4) a respect for property rights; and (5) monetary restraint. Unfortunately, we seem to be moving further and further away from all 5, something that will be exacerbated if Labor win another term. How long can the world (read: China) sustain her demand for Australian commodities? Only time will tell, but the game is getting closer to running out and if Australia continues to move away from the five points above, when time is eventually called on the resources boom, the illusory prosperity in Australia will come crashing down. If the mining boom ends there is only so much consumption of the existing capital stock that is possible and it certainly cannot go on forever. As Adam Smith said, "...there is a great deal of ruin in a nation," implying that it takes a lot of waste (government) to ruin a wealthy nation with a large capital stock. Sadly, we are moving further and further in that direction as the resources boom hides the true effect government policy is having on Australia.

This is why I am not celebrating the recent GDP data in the same way that the majority of political and economic pundits are.