Australian consumers spent heavily coming out of the Covid Delta lockdowns in the last quarter of 2021 and dragged the economy out of its September slump to very solid 4.2% growth in annual Gross Domestic Product for 2021.
In fact apart from a modest impact from Omicron in the current March quarter, Covid blows to the economy are mostly gone and the major area of “uncertainty” (to quote RBA Governor Phil Lowe in his post-meeting statement this week) from now on is the events in Ukraine and the impact of rising inflation from surging energy costs in particular.
The big spendathon saw a 3.4% quarter on quarter rise in GDP in the final quarter of the year from the 1.9% slide in the September quarter.
Covid Omicron appeared in December and hit activity – as the 4.4% slide in retail sales in the month confirmed. But retail sales partly recovered in January with a 1.8% gain.
Retail volumes were up a record 8.2% in the final quarter of last year, even after the December slump.
After trade and private business investment gave no help to growth (in fact detracted), a 6.3% surge in household spending in the quarter saved the economy from a very weak outcome.
The ABS said household spending on both goods and services rose, with recreation and culture, cafes and restaurants and clothing and footwear seeing strong rises.
“Spending on goods rose 6.3%. This reflects the pent-up demand for items such as clothing and footwear, furnishings and recreational goods over the lockdown period where non-essential retail stores were closed. Spending on goods was 8.8% above pre-pandemic levels.”
The ABS said domestic demand drove the growth with high levels of household spending, particularly in the states that emerged from COVID-19 lockdowns.
“Household spending in NSW, Victoria and the ACT rose 9.6 per cent, compared to the rest of Australia which rose 1.6%,” The ABS said.
In fact household spending has recovered to where it was before the Covid pandemic with the quarter on quarter growth topping most forecasts around 2.8% to 3.0%.
The National Australia Bank’s economics group said in a note on Wednesday: “Today’s release doesn’t alter our expectations for growth going forward, with Q1 to be impacted by Omicron early in the quarter but signs suggest activity has already rebounded.”
“We continue to see growth of around 3.5% over 2022, and closer to trend growth of around 2.1% in 2023. With GDP now above pre-COVID levels and activity to remain healthy through 2022, the focus for the RBA will continue to be on the nominal side.”
“We expect unemployment to fall to around 3.5% by mid-2022 and wage growth to pick up, with the RBA having enough evidence that inflation is sustainably within the target band to begin normalising rates in the second half of 2022.”
It’s clear from the Australian Bureau of Statistics data that the economy is out of the woods so far as the impact of Covid is concerned and the solid 4.2% gain over 2021 now sees the economy now almost 3.4% larger than late 2019 ahead of the pandemic.
The December quarter’s gain was the largest quarterly rise since the 3.4% bounce recorded in the September quarter of 2020 that followed the end of Australia’s first Covid-driven shutdown.
The domestic side of the economy contributed strongly to the overall result, adding 2.9 percentage points to growth.
Household final consumption added 3.2 percentage points as shoppers were able to spend in local stores that re-opened slowly in the early months of the quarter before Omicron appeared as a growing concern in December.
Offsetting the higher household spending were both private and public investment while there was no contribution from government spending which had supported the September quarter result.
The ABS said there was a fall of 1.4% in private investment which was impacted by shortages of labour and construction materials. In turn dwelling investment fell 2.2% despite high levels of dwelling approvals in recent quarters.
The Terms of Trade fell 5.1%, the largest fall since June quarter 2009, driven by strong growth in import prices – mostly oil, petrol and similar products.
The spendathon by households showed up in a sharp fall in household savings in the quarter with the savings to income ratio slumping from 19.8% in the September quarter to 13.6%.
The ABS said a fall in household income in the quarter (because of a drop or ending in government support) also played a part in the fall in savings. The end of year ratio of 13.6% is still above levels in early 2020 ahead of the first lockdowns.
