Westpac has lifted its GDP growth forecast in 2021 from 4% to 4.5%, with the 2022 forecast holding at 3%.
The December quarter national accounts provided rich evidence of the key dynamics that will emerge as the recovery continues.
They showed continued evidence of Australia’s bounce back from the pandemic induced recession in the first half of 2020.
Growth in GDP printed at 3.1%qtr, following the 3.4% increase in the September quarter. Annual growth is now -1.1% for 2020, compared to market expectations of -2% only a week earlier.
The key components of growth – household consumption; business investment and dwelling construction all surprised on the upside.
Our forecasts for GDP growth anticipate solid ongoing momentum in those components in 2021.
Household consumption lifted by 4.3% in the December quarter 2020, significantly boosted by the reopening of Victoria where spending increased by 10.4%. Spending in the rest of Australia rose by 2.3%. This result provides compelling evidence of the “reopening” effect with Victoria contributing around 2ppts to the growth rate in household spending.
Despite the 10.4% rebound, spending in Victoria is still 7.2% below its pre-pandemic levels. Clearly a further large reopening effect is still to come, boosting our forecast for overall household spending growth in the March quarter to 2%, (1 ppt provided by Victoria).
That 2.3% lift in spending outside Victoria is still very strong and reflected households’ high confidence levels; the emerging boom in housing; and the accumulated savings that are now allowing households to slow their growth in new savings.
Over the quarter the household savings rate fell from 18.5% to 12%, reflecting that sharp slowdown in new savings’ growth (new savings slowed by $22 billion while spending lifted by $12 billion).
The capacity for the household sector to continue to slow the growth in new savings, and further subsidise spending, will be the key driver of the household spending outlook in 2021.
Note that households saved $187 billion in 2020 – more than total savings over the previous three and a half years.
The spending patterns in 2021 will be quite different to those in 2020. At a broad category level, consumer spending on discretionary services remains well below pre-COVID levels (–27%). Against this, spending on durables is 11.8% above pre- COVID levels while spending on basic food is up 6.2%.
JobKeeper payments in the December quarter were estimated at $11.3 billion compared to $36 billion in the September quarter. Looking into 2021 we can see that the curtailment of JobKeeper in the June quarter will have a significantly smaller impact (from the lower base) on household incomes than we saw in the December quarter.
Our forecast for annual growth in household spending in 2021 is 5.8%. This forecast recognises the boost from Victoria in the March quarter; the soft patch in the June quarter as government support is withdrawn; followed by the boost from vaccines/ reopening in the second half.
The new savings rate in 2021 is expected to average a relatively low 4.6% as households take comfort in the high level of savings that have been accumulated in 2020; respond to the further relaxation of social distancing rules; and leverage up as the housing market booms.
This forecast is adversely affected by the collapse in population growth as foreign borders remain closed for the full year.
The importance of the savings/reopening/housing/services catch-up effects can be seen by looking at the per capita challenge. To achieve the 5.8% annual growth rate in overall household spending, per capita growth will need to run at around 5.6% – compared to a post GFC average of 1.7%.
Household spending represents around 55% of total GDP. Of course, it has been the volatility of household spending that has driven the growth profile through the pandemic and represents the largest swing factor for our forecasts.
The recovery in the housing market in 2021 is also going to play a pivotal role. We have lifted our new dwelling growth forecasts in 2021 to 7.1% following the 5.1% contraction in 2020; while renovations and additions are also expected to hold up at 7.1% from the 10.6% growth rate of 2020.
With 2021 and 2022 (Westpac is forecasting a cumulative 20% increase in dwelling prices over that period) shaping up as “housing boom times” the spill-over effect from housing through jobs growth; confidence; leverage; wealth effects will also be significant.
Business confidence surveys, like the Westpac Melbourne Institute Consumer Sentiment Index, are near historical highs. Businesses are responding to the optimism of their customers and we are seeing early evidence of improving investment conditions.
Equipment investment is being boosted by the government’s “instant write-off” policies for small business while business confidence is pointing to a much improved equipment investment environment. We expect growth of 12.5% in new equipment investment in 2021 peaking at 20% growth in June 2022 in response to the accelerated depreciation allowances.
In contrast, prospects in engineering, including infrastructure mining projects, and commercial construction are less encouraging with contractions of 3% and 6% expected in 2021.
These key components of our forecasts mean an increase in our growth forecast for 2021 from 4.0% to 4.5%.
We have retained our forecast of 3% growth in 2022.
With growth of 1.6% expected in the March quarter 2021 the level of GDP in the March quarter is expected to exceed that in the December quarter of 2019 by 0.4%, returning activity to pre- pandemic levels one quarter earlier than we had previously expected.
But with trend growth expected at 2.75% in 2020, a build-up in spare capacity in 2020 of around 4% of GDP is going to take some years to clear.
On our forecasts that 4% “gap” will only be closed by 1.5% of GDP by the end of 2022.
