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Economics | June 3, 2020

Bushfires, floods, drought, cyclones and a pandemic end record expansion National accounts Expansion ends: Under the weight of an extraordinary barrage of adverse events, the Australian economy

contracted by 0.3 per cent in the March quarter (consensus -0.4 per cent). It was the first fall in output in nine years. The economy grew 1.4 per cent on the year.

Contribution to growth: The biggest contributions to growth came from net exports (+0.5 percentage points) and government consumption (+0.3pp). But detracting from growth was household spending (-0.6pp); inventories (-0.2pp); and dwelling and business equipment (both -0.1pp).

Income: Real net national disposable income rose by 0.5 per cent in the March quarter to be up 2.4 per cent on the year. In nominal terms GDP rose by 0.8 per cent in the quarter and rose by 3.1 per cent over the year.

Productivity: GDP per hours worked rose by 0.5 per cent in the March quarter to be up by 1.4 per cent on the year.

Industry sectors: Eleven of the 19 industry sectors contracted in the March quarter. Two sectors each took 0.2 percentage points (pp) off economic growth: Accommodation and food services and Transport, postal and warehousing. Six sectors added 0.1pp each to growth.

What does it all mean? The Australian economy shrank just 0.3 per cent in the March quarter. -0.3%! It’s worth reflecting on that a while.

The economy was hit by bushfires, drought, cyclones, flooding and a global pandemic and only fell 0.3 per cent. At an annualised rate, that represents a 1.2 per cent fall. The US economy shrank 5 percent in the March quarter; the UK fell 7.7 per cent; Germany fell 8.6 per cent; and China fell 33.8 per cent.

The economy is forecast to contract by around 8.5 per cent in the current quarter (the June quarter). That is to be expected given that the economy was in lockdown over most of the period. A lockdown of necessity, as a result of the COVID-19 health emergency. Interesting that it took a healthy emergency to break the record economic expansion.

Fiscal and monetary stimulus measures have been applied liberally, so there is likely to be a healthy lift in activity in the September and December quarters. But the important caveat: assuming that Australia’s COVID curve stays flat.

And there may be even more stimulus forthcoming with a building/construction recovery package being considered. And both the Arts and Tourism sectors also may be in line for additional funds. So far $285 billion in stimulus measures (around 13 per cent of GDP) have been promised by all levels of government and the Reserve Bank.

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Economic Insights. Bushfires, floods, drought, cyclones and a pandemic end record expansion

It will be important for the Federal Government and Reserve Bank to ensure that the downturn is brief and that Aussies quickly return to work. That way the economy – and life generally – will quickly return to some sense of normalcy.

The stimulus must be paid for. And it will. But that is more a consideration for 2021 and beyond. Australia’s external debt burden is modest. And low interest rates and firm export receipts ensure that debt can be easily serviced.

The world has noted the good news story ‘down under’, pushing the Aussie dollar to near US70 cents. If the dollar continues its ascent that could slow momentum of export-focussed sectors and companies.

What do the figures show? Economic Growth: The Aussie economy contracted 0.3 per cent in the March quarter after lifting by 0.5 per cent

in the December quarter. It was the first contraction in gross domestic product (GDP) in nine years.

The economy grew by 1.4 per cent over the year to March after 2.2 per cent growth in the year to December. Growth has averaged 2.6 per cent over the decade and averaged 2.7 per cent over the last 15 years.

The non-farm economy fell by 0.3 per cent in the March quarter after a 0.5 per cent lift in the December quarter. Annual growth stands at 1.6 per cent.

Farm GDP fell by 2.4 per cent in the March quarter to be down 10.3 per cent over the year.

At current prices, GDP rose by 0.8 per cent in the quarter to be up 3.1 per cent over the year (decade average +4.5 per cent).

As at March 2020 the Australian economy was valued at $2,008.6 billion.

Growth drivers: The biggest contributions to growth came from net exports (+0.5 percentage points) and government consumption (+0.3pp). But detracting from growth was household spending (-0.6pp); inventories (-0.2pp); and dwelling and business equipment (both -0.1pp).

Inflation & wages: In terms of domestic price pressures, the household consumption implicit price deflator rose by 0.5 per cent in the March quarter after increasing by 0.4 per cent in the December quarter. Annual growth lifted from 1.8 per cent to 1.9 per cent. Real non-farm unit labour costs fell by 0.9 per cent in the March quarter but was up 0.9 per cent over the year.

Productivity: GDP per hours worked rose by 0.5 per cent in the March quarter to be up by 1.4 per cent on the year. Gross value added per hour worked market sector rose by 0.8 per cent in the quarter to be up 1.5 per cent on the year.

States & Territories: The only data available is state final demand (more accurate data would include net exports but it is not available for all states and territories). State final demand in the March quarter: NSW (down 1.5 per cent); Victoria (down 0.1 per cent); Queensland (down 0.3 per cent); South Australia (down 1.0 per cent); Western Australia (up 0.9 per cent); Tasmania (up 0.6 per cent); Northern Territory (down 1.2 per cent); and ACT (up 2.1 per cent).

Consumer spending: Household spending fell by 1.1 per cent in the March quarter (biggest fall in 34 years) to be down 0.2 per cent for the year. Hotels, cafes and restaurants fell 9.2 per cent; Transport services fell by 12 per cent; Clothing and footwear fell by 8.9 per cent. Spending on Food rose 5.7 per cent with Alcoholic beverages up 3.5 per cent.

Industry sectors: Eleven of the 19 industry sectors contracted in the March quarter. Two sectors each took 0.2 percentage points (pp) off economic growth: Accommodation and food services and Transport, postal and warehousing. Six sectors added 0.1pp each to growth.

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Economic Insights. Bushfires, floods, drought, cyclones and a pandemic end record expansion

Other points: Profit share remains high. In seasonally adjusted

terms, the ratio of profits to total factor income rose from 28.9 per cent to 29.0 per cent in the March quarter. The wages share rose was stable at a 2-year high of 52.5 per cent.

Household savings ratio. The household saving ratio rose from 3.5 per cent in the December quarter to 5.5 per cent in the March quarter in seasonally adjusted terms.

Imports rose as a share of spending. The imports to sales ratio fell from an 11-year high of 0.405 to 0.383 in the March quarter.

The private non-farm inventories to total sales ratio eased from 0.590 to 0.585 in the March quarter.

What is the importance of the economic data? The quarterly National Income, Expenditure and Product

release (national accounts) from the Bureau of Statistics is an assessment of Australia’s economic performance. Detailed estimates are provided on incomes (wages, profits), spending (such as household, dwelling investment and trade (exports and imports) and production. Other data includes household saving and the economic performance of States and Territories. The main use of the national accounts figures is as a historical record of economic performance. The information has little forward-looking value for currency, interest rate or share markets.

What are the implications for interest rates and investors? In the March quarter, Australia was hit by events that could be described of “biblical proportion”, so a contraction

of the economy was always on the cards. The fact that the decline was only 0.3 per cent is remarkable.

Challenges lie ahead, but governments can do more to support the economy. The approach has to be one of “whatever it takes”, with the objective of job creation and business survival.

The Reserve Bank doesn’t need to do any more. As the Reserve Bank Governor stresses, measures like negative interest rates are likely to have more costs than benefits.

The lift in household income and saving is encouraging. Aussie households aren’t tapped out, rather cautious.

The lift in productivity couldn’t have come at a better time. But now it is important for it to be sustained and built upon.

Craig James, Chief Economist, CommSec Twitter: @CommSec

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Economic Insights. Bushfires, floods, drought, cyclones and a pandemic end record expansion