The shutdown of the Australian economy between late March to mid-May to contain the spread of the COVID-19 pandemic resulted in GDP contracting by a sharper-than-expected 7.0% in Q2 (median estimate was -6.0%) following on from a 0.3% decline in Q1. Over the period, activity contracted by 7.2%, an extremely severe shock but at the modest end of the scale in a global context. In annual terms, GDP growth rolled over from 1.6% to -6.3%, while in level terms, GDP fell back to where it was in Q3 2016.
The closure of non-essential services and the effects of social distancing restrictions towards the end of March resulted in economic activity and mobility being greatly reduced. This was most pronounced in April to mid-May, before the restrictions started to be gradually eased after the virus infection rate was slowed, with the National Cabinet agreeing to a three-stage reopening plan. A robust rebound ensued through to mid June when it started to lose momentum as virus concerns returned in Victoria and this had spillover effects on confidence in the other states.
The labour market endured a very significant dislocation in the quarter, with total job losses of around 870k, the unemployment rate surging to its highest levels in more than 20 years and hours worked across the economy falling by 9.8% in the quarter. Fiscal support from the Federal Government, centred on direct income measures, has been unprecedented and has helped to mitigate the full impact of the labour market dislocation. Meanwhile, the RBA's Term Funding Facility has provided the banking sector with $52bn in cheap 3-year liquidity since its inception in late March, while it has also purchased $61.3bn of Australian Government Securities in support of its 0.25% 3-year yield target and to help the bond markets function effectively amid a tide of new issuance from the AOFM. To the details of today's national accounts, household consumption plunged by 12.1% in the June quarter, with the ABS noting the consumption of services collapsed by 17.6% as the restrictions hit areas including travel and eating out. In real terms, household income surged up by 3.0% in response to the impact of the Federal Government's income supports, but with few places to go and with confidence having been weakened severely, most of this will be kept for another day as the household saving ratio soared from 6.0% to 19.8%.
Across the other components, residential construction activity saw accelerated weakness contracting by 6.8% in Q2 and faces an uncertain outlook with restrictions on movement in and out of Australia set to persist for a while yet. Unsurprisingly, weakness in business investment also became more pronounced (-3.5%) as firms focused on preserving liquidity to make it through to the other side of the crisis, while the uncertain economic climate has led to investment plans being cut back. Imports (-12.9%q/q) were more severely impacted through the initial phase of the pandemic than exports (-6.7%q/q), with the latter receiving support from resources shipments and overseas students that remained in the country. Public demand also lifted in Q2, focuesd on spending (2.9%q/q) as investment declined (-1.6%q/q). Link to our full review here
