The Australian economy grew faster than expected in the March quarter but the figures harbour a sinister fact and I am not surprised to see our share market stay firmly in the red.
Gross domestic product (GDP) grew 0.9% in the first three months of the calendar year in seasonally adjusted terms, which represents an annual growth rate of 2.3%.
Economists polled on Bloomberg were tipping quarterly growth of 0.7% and annual growth of 2.1%.
But investors didn't like what they saw. The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) was trading around 0.7% lower before the news and it fell to 0.9% during lunch time trade.
On the one hand, there are worries that the better than expected GDP figure could give the Reserve Bank of Australia (RBA) reason to hesitate on cutting interest rates again. You only had to look at yesterday's rate decision to see how badly equity investors want another rate cut.
On the other hand, the 0.3 percentage point fall in total gross fixed capital formation, which refers to business and infrastructure investments in plant and machinery, roads, railways, etc., is concerning.
Total gross fixed capital formation was the biggest detractor from our GDP and confirms what we have long suspected – that governments and businesses are not investing enough to keep our economy going since the mining boom came to an ugly and painful halt.
While the drop in investment isn't much of a surprise and is backward looking, we have yet to see any real light at the end of the tunnel, particularly since the dismal capital expenditure data was released and showed non-mining businesses continuing to cut back on spending.
Adding insult to injury, currency traders took a "glass half full" view of the GDP data and drove the Australian dollar higher to US78.1 cents from around US77.75 cents. A higher currency is generally a negative for most Australian businesses.
Growing exports and higher household spending gave the GDP number a boost but there's little sign that other parts of our economy are firing up to offset the mining slowdown.
Funnily enough we can thank the "irrational" iron ore production expansion by Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX:BHP) for the strong growth in exports.
This could take some wind out of Fortescue Metals Group Limited's (ASX: FMG) accusation that BHP and Rio Tinto are acting against our national interest.
The heat map above says it all. The only sector keeping its head above water is materials with Rio tinto jumping 2.1% to $57.65 and base metal miner Independence Group NL (ASX: IGO) surging 4.4% to $4.78 on the back of firmer commodity prices; with interest rate sensitive sectors like financials and consumer discretionary stocks taking the brunt of today's sell-off.
I am expecting this volatility to persist well into the third quarter of 2015 but that will set a stage for a end of year rally.
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