A big week for the Australian economy with confirmation expected on Wednesday’s national accounts of the steepest fall in GDP since the Great Depression and another no move decision from the Reserve Bank on interest rates tomorrow.
The data in Wednesday’s National Accounts will be the big economic event (in a big week for data). Also out this week will be the private credit data from the Reserve Bank today, house prices for July tomorrow, data on business stocks, sales and incomes, the current account and government finances for the June quarter, data for the month of July including building approvals, retail sales, trade, and car sales.
And interesting influence that emerged from mid- has been the rise in the value of the Aussie dollar – it jumped above 73 US cents on Friday to close at its highest level since December 2018. It is up more than 14% since the lows of late March.
Tomorrow, the RBA will leave monetary policy on hold for the sixth month in a row after having provided massive monetary stimulus back in March.
The RBA is still in “watch and wait” mode, and the policy focus remains largely on fiscal policy, especially the size of continuing support for jobs.
The AMP’s Dr. Shane Oliver thinks the RBA will again underline how it’s prepared to support the economy for as long as it takes.
“Given the uncertainty around the pace of recovery and the risks flowing from Melbourne’s lockdown, the RBA is likely to reiterate its dovish forward guidance on rates and note that it stands ready to do more if needed,” Dr. Oliver wrote in his weekly note.
“Ultimately, we think it will ease further sometime in the next six months as its own forecasts have the attainment of full employment and the sustainable achievement of the inflation target as being more than two years away.
“In terms what it might do if it eases further, it has all but ruled out negative interest rates, foreign exchange intervention and the direct monetary financing of government spending, but sees still lower but positive interest rates and the purchase of more government bonds as possible options.
“Meanwhile, rate hikes are at least three years away,” Dr. Oliver wrote at the weekend.
Wednesday’s National Accounts will show a bug drop quarter on quarter in economic growth for the June quarter and for 2019-20.
Dr Oliver says “June quarter GDP data is expected to show a post-WW2 record slump of 5.9% quarter on quarter or an annual fall of 5.2% as a result of the hit to the economy from coronavirus.
“This will likely confirm a slide into recession for the first time since the early 1990s, assuming the March quarter decline of -0.3% is not revised up into positive territory (which is quite possible).
“However, this has been long anticipated so should not be a surprise to anyone and it’s likely to have been far milder than early expectations for a -10%qoq slump and milder than the June quarter GDP slump seen in other comparable countries with the US at -9.1%, the Eurozone at -12.1%, the UK at -20.4% and Japan at -7.8%.
Significant falls are likely to have been seen in consumer spending, dwelling investment, and business investment but with net exports and public spending contributing positively to growth,” Dr. Oliver wrote.
Moody’s wrote on Friday that “We expect Australia’s GDP to have contracted by 6.8% on a quarterly basis over the June quarter after a 0.3% decline in the prior quarter.”
“The slowdown in the March quarter resulted from a sharp decline in domestic consumption and investment, as the economy was hit by a prolonged drought and one of the worst bushfire seasons in recent history.
“Compounding the problems were the early stages of the COVID-19 restrictions, which came into effect in March and severely impacted services industries.
“While the easing of restrictions since May has revived domestic spending on the back of pent- up demand, weakness in total spending arising from a fragile labour market, a complete pause on tourism and immigration, and low external demand will weigh on the aggregate, putting an end to nearly three decades of expansion as the economy slips into recession.
And the National Australia Bank also wrote on Friday on the National Accounts, saying in a note that it expects GDP to have fallen 5.8% quarter on quarter in the three months to June.
“The decline will be led by a fall in household consumption, particularly for services which were most heavily impacted by the containment measures. Key partials for dwelling and business investment released last week point to sizeable – though not as severe as expected – falls. However, these declines are likely to be an order of magnitude smaller than the decline in consumption.
“Net exports looks to have made a solid 1.2ppt contribution to growth in the quarter, with a decline in exports more than offset by a fall in imports. On a production basis we expect to see significant variation between industries – with those related to household services and export services (tourism and education) most significantly impacted,” NAB economists wrote.
Looking forward, the NAB expects the recovery in activity but it will be gradual, with GDP not reaching pre-virus levels until early 2023.
“We expect a fall in activity in Victoria to broadly offset a rebound in growth elsewhere in the September quarter before an aggregate improvement across the states in Q4.
“This would see GDP fall by 3.8% in year-average terms this year and rise by 0.8% in 2021. From there we see growth rising to around trend.
“This gradual recovery in activity will also see the labour market improve but with a lag. Therefore, after peaking at over 9% this year the unemployment rate is expected to fall to 7.6% by end 2021 and 6.6% at the end of 2022, “ the NAB forecast explained.
