Australian Economy Rebounds

Economist's View

Download the PDF version including our economic update by region here: Australian Economy Rebounds

This week the Australian Bureau of Statistics (ABS) released the much-awaited September quarter national accounts, revealing the extent of economic recovery after the worst quarterly decline on record. Australia’s economy followed up the June quarter’s historic 7% contraction with a 3.3% rebound, the strongest quarter of growth since the mid 1970s.

The outturn was stronger than what most economists and policymakers had expected, and was all the more impressive given the quarter included much of Victoria’s strict lockdown, which saw that state’s final demand fall by 1%. Indeed at the time of the lockdown in early August, the RBA expected the hit from Victoria to offset the growth from the other states, and the Federal Budget released in early October revealed that the Australian Treasury were expecting just 0.5% growth in the quarter.

While undeniably strong, the 3.3% expansion recovered less than half of the 7.3% fall in output over the first half of the year, leaving the economy still 4.2% below its pre-COVID level and 3.8% smaller than the same period last year. Australia could also be forgiven for feeling short-changed compared to some other countries’ third quarter rebounds. Real GDP bounced back by 5% in Japan, 7.4% in the US, and 8.5% in Germany in Q3, while France and the UK saw expansions of over 15%.

This was arguably to be expected, given that each of these economies suffered worse contractions than Australia in the June quarter. However, with the exception of UK (which had fallen -19.8% in Q2), these economies are all now closer to their pre-COVID levels than Australia. On the other hand, the headwind of Victoria’s lockdowns in Q3 has turned into a tailwind now that the state is reopening, and with several other countries experiencing resurgent outbreaks and renewed lockdowns, Australia appears set to outperform many developed economy peers again in the fourth quarter.

As a whole, Australia’s national accounts data for the September quarter largely reflects the easing of restrictions across most of the country and the impact of the government policy response. This was seen most clearly in consumer spending. After lockdowns drove an unprecedented 12.5% fall in household consumption in Q2 (accounting for 93% of the fall in GDP), an easing of restrictions resulted in a 7.9% rebound in Q3, by far the strongest consumption growth on record. Spending on services, which bore the brunt of the shutdowns and fell 17.9% in Q2, bounced back by 9.8% as the economy reopened, with the worst hit sectors rebounding the most. Spending on heath rose 26% (Q2: -20.1%), hotels, cafes and restaurants rose 49.7% (Q2: -56.3%) and transport services rose a whopping 50.7%, though remains down 82.2% from a year earlier given the June quarter’s 86% fall.

While clearly driven by the easing of lockdowns, the strong rebound in consumer spending also reflects resilient household incomes, which continue to be supported by government stimulus measures. Government support saw household disposable income defy falling employment and labour income to post 3% growth in Q2, and a rebound in employment (and therefore labour income) in the third quarter combined with continued fiscal support to push household income another 3.4% higher in Q3. With household consumption outpacing the rise in incomes, the household saving ratio fell back from the June quarter’s record high 22.1%, but at 18.9% it is still very elevated (well above its average of 6.6% over the 10 years before 2020). The rate of household saving therefore has plenty of room to fall further and support consumption growth over coming quarters even if incomes weaken as government support measures wind down.

In addition to supporting household incomes and consumption, government also continued to support growth through direct expenditure, with public demand following up the June quarter’s 2.3% rise with a further 1.2% gain, driven by growth in both public consumption and investment. Higher government investment and 0.6% growth in dwelling investment (Q2: -5.2%) helped offset further weakness in private business investment, which fell another 3% in the quarter after a 5.2% decline in Q2. As discussed in last week’s Brief, an investment recovery is likely to be patchy in the near term as businesses may remain hesitant to lift their capital expenditure in force until there is more certainty around widespread vaccination and border controls.

It’s a similar story for our exports, (particularly services) which fell again in the quarter (-3.2%, following -7.5% in Q2). It will take a recovery in external demand, and particularly for services, more certainty around our international borders, before exports recover meaningfully. As a result, with imports likely to keep rising as domestic demand recovers, net exports could continue to subtract from GDP growth in the coming quarters.

It is therefore likely that we will continue to rely on the government and particularly the consumer to drive growth in the near term. And with some government measures winding down, will this pose a risk to continued recovery, particularly for the consumer?

We continue to hold the view that even as some fiscal measures wind down, the consumer can continue to rebound and support GDP growth until a vaccine is distributed and the economic recovery broadens to business investment and exports. Reduced government support will have a negative impact on household incomes, however this will be buffered by a continued rebound in labour income as employment continues its recovery. The December quarter is already off to a good start in the respect, with employment rising by 180k (1.4%) in October alone. Combined with strong savings buffers, rising asset prices and high confidence about forthcoming vaccines, the consumer is well placed to weather the withdrawal of some stimulus and continue driving the recovery in Australia’s economy, which is now on track to return to its pre-COVID level by mid next year.

Table 1: Financial market movements: 26 November - 3 December 2020