Australian Q1 GDP -0.3% to 1.4%yr

The effects of the summer bushfires and the emergence of the COVID-19 pandemic had a severe and sudden impact on the Australian economy, which recorded its first contraction in 9 years with a 0.3% fall in the March quarter. This was between our estimate (-0.2%) and the market consensus (-0.4%). In annual terms, GDP growth slowed from 2.2% to 1.4% to be at its weakest pace since the low point during the GFC. The policy response to these developments has been unprecedented, both from a monetary and fiscal perspective. On March 19, the Reserve Bank of Australia lowered the cash rate to its effective lower bound (0.25%) and introduced yield curve control targeting 0.25% on 3-year Commonwealth Government bonds complemented by forward guidance to leave this support in place until progress is achieved in meeting the Bank's employment and inflation objectives and a $90bn funding facility to provide cheap liquidity to the banking sector. A total of around $190bn of direct fiscal support measures (around 10% of GDP) have been announced by the Federal government to limit the impact on the economy and assist the labour market through this extremely severe shock. 

The chart below provides context around the timing of the emergence and escalation of COVID-19 in Australia and the policy responses that have followed. Travel restrictions were first implemented in early February leading up to a closure of the international borders by late March. Social distancing measures were introduced and then progressively tightening from around mid-March (click to expand).  

As the chart, below, indicates, the impact of these measures drove an incredibly sharp reversal in consumer spending (-1.1%qtr, -0.2%yr). This was due to discretionary consumption collapsing (-3.9%qtr) as precautionary behaviour took hold, though spending in non-discretionary areas (+0.7%qtr) was driven by an extremely strong surge in food and other essentials ahead of the lockdown over April.   

The downturn in the residential construction cycle will become more extended than earlier expected as a further 2.2% fall in new home building accelerated the contraction in that area of activity by an astonishing 15.5% over the past year. Business investment was weak ahead of the pandemic but will fall much further in response to the collapse recorded in confidence and conditions in the NAB's Business Survey. Significant structural change forced upon businesses in terms of how they can operate will have an impact beyond the easing of restrictions. Growth in public demand was strong over the March quarter (1.5%) driven by spending in response to the pandemic and bushfire emergency. Inventories were run down heavily in Q1 reflecting the difficulty retailers, most notably supermakets, had in responding to the surge in demand as households stockpiled. Net exports added 0.5ppt to activity in the quarter, though this was on weak details as export (-3.5%) and import volumes (-6.2%) contracted sharply. Inbound and outbound tourism collapsed as a result of travel-related restrictions, while uncertainty and a weak economic outlook hit demand for capital goods.   

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