Momentum in the recovery of the Australian economy from the covid-19 pandemic was sustained at a faster-than-anticipated pace over the final months of 2020, as real GDP growth topped the range of market estimates in advancing by 3.1% in the December quarter. This follows on from the 3.4% rebound in the September quarter during the initial stages of the reopening.
The onset of the pandemic and associated shutdowns led to output contracting by 7.3% over the first half of 2020, before the easing of restrictions enabled the recovery to start and then gather momentum during the second half over which activity rebounded by 6.6%. Overall, real GDP was still 1.1% down on its pre-pandemic or end 2019 level. However, based on the RBA's forecasts from its February Statement on Monetary Policy, real GDP at the end of 2020 was 3.7% lower than where it was anticipated to be in the absence of a significant shock from the pandemic, and this is the situation policymakers have sought to remedy. At its March meeting, the RBA Board reiterated its commitment to its 0.1% yield target on 3-year Commonwealth Government bonds and remaining with the forward guidance that the macro conditions required for an increase in the cash rate are not expected "until 2024 at the earliest". Furthermore, the RBA had earlier this year expanded its bond purchase program by an additional $100bn to contain yields at the longer end of the curve and place downward pressure on the exchange rate. While the economy must still weather the tapering of fiscal measures that supported incomes during the peak of the crisis, the elevated level of the household saving ratio should help smooth the transition.
Australian households continued to drive the recovery forward in the December quarter on a wider reopening effort as the state of Victoria emerged from its shutdown. Household consumption growth lifted by 4.3% in the quarter following on from Q3's 7.9% surge, though it was still down by 2.7% through the year. Leading the way was Victoria where spending rebounded by 10.4% in Q4 after declines in each of the previous 3 quarters (-7.2%Y/Y). Real growth in household disposable income contracted 3.3%q/q reflecting the tapering of fiscal supports, and this led to a decline in the saving ratio from 18.7% to 12.0%.
The easing of restrictions led to an increased range of opportunities to spend, with the consumption of discretionary services rebounding sharpest over the second half of the year after being most heavily affected by the emergence of the pandemic. But goods consumption has elevated sharply (6.2%Y/Y) benefitting from substitution effects to areas of in-home spending, as well as retail and new vehicles supported by the stimulus measures.
In addition to household consumption, activity in the December quarter was supported more broadly than in the previous quarter. Residential construction activity lifted by 4.1% in Q4 (0.6%Y/Y) as new home building (3.4%) and alterations (5.2%) were responding to strong demand associated with the Federal Government's HomeBuilder scheme and low interest rates. Business investment posted its strongest quarterly rise of 2.6% in more than 3 years (-5.1%Y/Y) as improving economic conditions combined with the expanded tax incentives in the most recent Federal Budget to drive demand for capital goods (8.1%q/q). Import volumes continued to reflect reopening dynamics (4.9%q/q), supported by household consumption and capital goods investment. This outpaced a 3.8% rise in exports, though it was notable that this was driven by the agriculture sector as production rebounded on better seasonal conditions after the earlier drought. Reflecting this, farm GDP surged by 33.3% in Q4. Overall, net exports subtracted modestly from growth (-0.1ppt), as did inventories (-0.1ppt).
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