Preview: Australian Q1 GDP

Australia's national accounts for the March quarter are due to be released by the ABS today at 11:30am (AEST). Our forecast is for GDP to have contracted by 0.2% in Q1. After slowing sharply between the second half of 2018 and the first half of 2019, momentum in the domestic economy improved in the December quarter as annual GDP growth firmed from 1.8% to 2.2%. However, that momentum was derailed by the emergence of the COVID-19 crisis in Australia. Government authorities responded initially by implementing travel restrictions for non-resident arrivals from early February and were progressively tightened through March leading to a closure of the international borders. Social distancing measures were introduced from mid to late March resulting in the shutdown of non-essential services and strict limits being placed on numbers for outdoor and indoor gatherings. These measures led to a significant deterioration in economic conditions as businesses responded by standing down or releasing employees, while retained workers had their hours reduced. Meanwhile, the focus of households turned to the impending lockdown as precautionary spending was driven up very strongly, supported also by areas of household goods and home entertainment. Export volumes were weakened by travel restrictions and iron ore shipments were disrupted by Tropical Cyclone Damien in Western Australia, while imports collapsed as the outlook for business investment deteriorated.  

As it stands | National Accounts — GDP

Output growth in the domestic economy matched the consensus forecast rising by 0.5% in the December quarter, while the annual pace firmed from 1.8% to 2.2% to be a little more than half a percentage point above its post-GFC low. With annual growth remaining at a sub-trend pace since the second half of 2018, the domestic economy approached the COVID-19 crisis in a relatively fragile position. The same can be said of the global economy with the OECD estimating that the growth momentum slowed to a 2.5% pace through the year to the December quarter from around 3.0% a year earlier due to trade tensions and geopolitical uncertainty weighing on activity.

In Australia, GDP growth in 2019 was driven by public demand and net exports as weakness in private demand persisted in response to subdued growth in household consumption, declining business investment and the downturn in the residential construction cycle. Ongoing drought conditions had been significantly impacting production in the agricultural sector for some time, while widespread bushfires had devasted regional communities across the nation over the final months of 2019 into early 2020.

From its mid-2018 peak of 3.1%, growth in household consumption had slowed to just 1.2%Y/Y by the end of Q4 to be at its weakest pace since the GFC as wages growth remained stuck in the slow lane, unable to be offset by both monetary and fiscal support in 2019 where the RBA lowered the cash rate by a total of 75 basis points and the Federal government provided increased tax relief to low- and middle-income earners. As concerns over the outlook intensified, consumer sentiment in this economy had been fragile, though it would likely have been much more pessimistic had it not been for a turnaround in the housing market over the second half of the year, most notably in Sydney and Melbourne. 

Residential construction activity was mired in its sharpest downturn in 7 years with both new construction and alterations rolling over in 2019 following sharp declines in dwelling approvals. Business investment contracted over 2019 (-1.2%) as mining investment continued to unwind ahead of a rebound in Q4, while in the non-mining sector investment had been expanding modestly until it was hit by a sharp 3.6% fall in the final quarter amid an increasingly uncertain outlook. Public spending that was focused on social assistance initiatives and defence was the leading contributor to GDP growth in 2019, while exports were also a key support driven by strength in resources and services.  

Key dynamics in Q1 | National Accounts — GDP Q1 forecast -0.2%

Household consumption — The profile of household spending was heavily focused on precautionary spending on essential supplies in food, pharmaceuticals, and liquor and household goods ahead of the April lockdown as discretionary consumption was shunned. Retail sales volumes were modest overall (0.7%qtr) as a record surge in food (6.4%) was moderated by significant contractions in clothing and footwear (-12.1%), cafes and restaurants (-8.4%) and department stores (-5.2%). Spending on household services is likely to have weakened sharply over March as restrictions were implemented. (Forecast: -0.2ppt in Q1).      

Dwelling investment — The residential construction cycle weakened further in early 2020 with activity contracting by 1.6% to be down by 12.4% through the year. This continued to be driven by the rollover in new home building, which retracted to its weakest level in more than 5 years after a 2.2% fall in Q1. Alteration work lifted by 2.3%, though this provides little offset. (Forecast: -0.1ppt in Q1).

Business investment — Weakness in private sector capital expenditure extended to a 5th straight quarter falling by 1.6% in Q1 and by 6.1% over the year. The emergence of the COVID-19 crisis saw business confidence and conditions collapse, with firms to delay or scale back investment plans over the quarters ahead. (Forecast: -0.2ppt in Q1).  

Public demand — Growth in underlying public demand was 1.4% in Q1, which was driven by a 1.8% lift on consumption spending against a broadly flat outcome from investment. This overall adds 0.3ppt to activity in Q1.  

Inventories — An unprecedented surge in demand for essential goods ahead of the nation's month of lockdown through April led to the sharpest run down on inventories (-1.2%) in a single quarter in more than 5 years. This looks to take 0.4ppt away from GDP in Q1.      

Net exports — A 0.5ppt contribution to GDP growth came through from net exports in Q1, though the details were weak. Export volumes contracted 3.5% (sharpest fall since Q1 2011) and imports collapsed by 6.2% (weakest since Q1 2009) as the strains from travel restrictions and economic uncertainty associated with COVID-19 hit.