The impact of the COVID-19 pandemic and widespread lockdowns in April and May saw a 7% quarter on quarter fall in Australian GDP in the three months to June, ending the country’s 28 years of unbroken growth (with a couple of narrow misses, such as in 2008-09 in the GFC).
The fall matching the forecast made by the Reserve Bank. Governor Phil Lowe told the House of Representatives Economics Committee at his August 14 online appearance.
“We do not yet have the GDP data for the June quarter, but it will show the biggest economic contraction in many decades, likely to be around 7 percent. If there is any good news to be found here, it is that this decline is not as large as initially feared.“
Australia’s fall was smaller than other bigger economies – the UK saw a 20.4% slump, the US, 9.5%, Germany, 9.7%, Canada, 11.5%, and Japan by 7.8%.
The news had little impact on the stockmarket – in fact, after a pause, it gained after the news was released at 11.30 am, moving over a 100 point gain for the session. But the Aussie dollar traded in a tight range around 73.50 to 73.60 US cents.
The tens of billions of dollars of support from governments and the Reserve Bank have clearly softened the size of the slump and stopped the contraction from hitting the early estimate of 10% or more in the quarter.
The 7% contraction in the June quarter followed the unchanged 0.3% contraction in the first three months of 2020.
That confirmed the nation’s first recession since 1990-1991 with the economy shrinking by 6.3% in the 2019-20 financial year which is the largest annual contraction since the figures first started being collected in 1957.
Australia’s previous worst quarterly result was the 2% contraction in June 1974 during the first global oil shock and the confusion and poor governance by the then Whitlam government.
The slump came off the back of a collapse in household consumption which fell by 12.7% in the quarter.
Private demand, unsurprisingly, prompted the collapse, falling 7.9% in the quarter; household spending — mostly on services — fell 12.1%, cutting 6.7 percentage points from GDP and driving the household saving ratio to a monster 19.8%, the highest rate since the Whitlam years, while dwelling investment fell 7.3%.
Discretionary spending dropped by 25%, while spending on services fell by 17.6%. Transport spending fell 85.9% thanks to border closures and the widespread lockdowns across the country. That also saw households cut spending on hotels, cafes, and restaurants by just over 56%.
Business investment slumped 6.9% although solid spending in the mining sector (especially the iron ore and gold mining sectors) helped soften the size of the slide.
The 3% fall in business inventories chopped 0.6% from GDP while private demand overall (mostly household spending cuts) lopped 7.9% from GDP.
GDP per capita fell by 7.4% after a smaller fall in the three months to March The previous record fall in GDP per capita of 2.4% occurred in the June quarter of 1974.
Compensation of employees fell a record 2.5% in the quarter. The average compensation per employee rose 3.1%. The ABS said this reflected a compositional shift in the workforce with reduced employment in part-time and lower-paid jobs.
Total hours worked fell by a record 9.8% and social assistance benefits in cash rose a record 41.6% (JobKeeper and the higher Newstart, now JobSeeker).
As a result, the government’s general net saving rate fell to an eye-watering minus $82.6 billion, reflected largely in the $55.5 billion worth of subsidy payments and reduced tax income as a result of COVID-19.
So what does this mean for the future – well September will be flat to a small negative reading because of the impact of lockdowns in Victoria.
But apart from that, the key is what will replace government funding programs over the next year. The Reserve Bank has $200 billion in support for banks to lend to customers at very low-interest rates, but the National Accounts for June confirm that to keep momentum in the economy, there will have to be more stimulation of private demand for the next year, just to keep it on an even keel while unemployment rises, and then eases slowly.
