Australian national accounts, June quarter. Strong demand, but hit from exports & inventories. Ahead of a sharp fall in Q3, on latest lockdowns. Q2 real GDP: 0.7%qtr, 9.6% yr. Q2 domestic demand: 1.7%qtr, 12.2% yr.
Read full report ‘Australia Q2 national accounts’ (PDF 293KB)
The Australian economy expanded by 0.7% in the June quarter, above market consensus of 0.4%. Annual growth lifted to 9.6% and activity is 1.6% above pre covid levels at the end of 2019.
There was a genuine risk that the expenditure measure of GDP could have printed a negative for the quarter. Together, private non-farm inventories and net exports subtracted a formidable 1.7ppts from growth in the quarter.
However, public inventories (0.35ppts) and farm inventories (0.15ppts) added a much needed 0.5ppts to growth (partly reflecting a stock piling of vaccines) ensuring that expenditure printed growth of 0.4%.
The other measures of GDP – Income (0.6%) and Production (0.9%) meant that the average growth rate surprised to the upside at 0.7%.
Avoiding the negative was important for confidence.
With the September quarter certain to print a negative under the weight of Lock Downs in both NSW and Victoria the announcement, in December, of two consecutive negatives would have signalled that Australia had fallen back into recession.
While the distortions of inventories and net exports (affected by disruptions to export shipments) threatened the overall growth number the real story of the June quarter was one of the growth momentum that had built up in the previous three quarters being sustained.
The ABS noted, “Lockdowns had minimal impact on activity overall, with fewer lockdown days and the more prolonged stay-at-home orders in NSW only commencing in the last week of June.”
Private final demand contributed 1.1ppt to GDP growth. That was highlighted by a 1.1% increase in household expenditure, including an increase of 1.3% in spending on services and 0.9% increase in goods spending. Business investment increased by 2.3% including a solid 2.4% increase in spending on machinery and equipment.
The household savings rate fell from 11.6% to 9.7% reflecting a 0.3% fall in gross disposable income as social benefit payments declined although this was partly offset by a 1.2% rise in compensation through increased employment and hours worked.
This relatively high savings rate is set to lift sharply in the September quarter as households receive a significant lift in social benefits while being constrained in their spending opportunities. In turn that savings buffer will be important in boosting spending when the NSW and Victorian economies reopen.
In short, today’s report captures the Australian economy in the rear vision mirror.
Westpac’s current forecast for GDP growth in the September quarter is for a contraction of 2.6%, although that number is set for review once the outlook for policy in Victoria is clearer. In turn we expect a bounce back of 2.6% in the December quarter as Australia reaches the 80% national average vaccination rate and NSW and Victoria reopen.
But there is an unusually high degree of uncertainty around the timing and shape of the recovery, not only due to the unpredictability of state government policies but also the behaviours of a largely fully vaccinated population dealing with high numbers of infections in the community.
While we have avoided the unwelcome prospect of a technical recession the near-term outlook is bleak compounded by unusual uncertainty in the medium term.
The Reserve Bank Board meets on September 7. When it last met on August 3 it was advised that the contraction in the September quarter would be “at least 1%”; Sydney was likely to reopen end September; cases in Sydney were holding at around 200 and Melbourne was not in Lock Down.
Even under those circumstances it was surprising that the Board confirmed its earlier commitment to begin tapering bond purchases from early September. A policy to reduce stimulus in the face of an economic contraction seemed curious. To maintain that policy next week when the depth and extension of the contraction is going to be much greater than expected in August seems unlikely.
Such a decision will also be made in the context of the increased uncertainty about the recovery. It seems that a delay of the taper would be prudent.
But a better decision would be to recognise the current crisis and lift the level of support using the only flexible instrument still available – bond purchases.
A sensible option would be to increase purchases from $5 billion to $6 billion per week subject to a review at the November Board meeting when the state and prospects for the economy would be much clearer than is the case today.
Read full report ‘Australia Q2 national accounts’ (PDF 293KB)
