Australia's national accounts for the September quarter are due to be published by the ABS this morning at 11:30am (AEDT). Expectations are for a rebound in real GDP of 2.5%q/q. The national shutdown following the onset of the Covid-19 pandemic led to the sharpest quarterly contraction in economic activity in the post-war period as GDP declined by 7.0% in the June quarter (see here), leaving its level 7.2% lower than at the end of 2019. Towards the end of the quarter, restrictions began to be gradually eased in most states enabling the recovery to commence. However, the recovery that has been taking place is far from complete and has been uneven across the economy due to the lasting effects of the pandemic through ongoing restrictions on activity and elevated spare capacity in the labour market, while in Victoria an acceleration in virus cases between late June and July led to the authorities there mandating a statewide shutdown by early August, with stringent containment measures in Melbourne remaining largely in place until late October.
Reflecting the impact of the reversal of Victoria's reopening, mobility indicators in Melbourne rolled over and remained considerably lower than in the other capitals throughout the September quarter. Mobility in Sydney appeared to be initially affected by the developments in Melbourne before recovering over August and September, while the other capitals were generally resilient and remained broadly steady as the recoveries in those cities progressed.
The initial reopening phase led to a partial recovery in the Australian economy that was supported by significant monetary and fiscal stimulus measures, helping to attenuate the shock that occurred in the labour market as the pandemic emerged. Around half of the earlier 872k job losses had been restored by the end of the quarter and while hours worked had improved sharply since the reopening the level was still around 5% below its pre-pandemic baseline. The easing of restrictions together with strengthened household balance sheets enabled household consumption spending to rebound in Q3, clearing some of the pent-up demand that accumulated during the shutdown. Policy stimulus also contributed to a sharp rebound in the detached housing market by owner-occupiers, with the first home buyer segment buoyed up by additional government incentives in some states, and while this was assisting the near-term outlook for residential construction, the headwinds from weak population growth dynamics will be intense for higher-density housing. Elevated uncertainty continues to restrain business investment and the outlook is unlikely to improve significantly until the effects of the pandemic dissipate more materially.
As it stands | National Accounts — GDP
The national shutdown and introduction of a wide range of other containment measures including activity and mobility restrictions led to a historic contraction in Australian GDP of 7.0% in the June quarter, swinging the pace through the year deeply negative to -6.3% from 1.6%. Larger declines in GDP were recorded in economies offshore where virus outbreaks were much more severe than in Australia, requiring tighter sets of restrictions and shutdowns of longer durations. In the June quarter, GDP across OECD economies contracted by 10.6%, with the euro area (-11.8%) and UK (-19.8%) especially hard hit, while US GDP declined by 9.0%. China's economy started to reopen in the June quarter and this generated an 11.7% rebound in output coming after a 10.0% fall in Q1.
Around 96% of the contraction in the Australian economy in Q2 was accounted for by a 12.1% fall in household consumption as the restrictions severely limited spending opportunities. Services consumption, most notably in discretionary areas such as overseas travel, recreation and culture and hotels, cafes and restaurants, collapsed during the quarter (-17.6%) while goods consumption also declined but much more modestly by comparison (-2.8%). The Federal Government's fiscal support measures were a key offset to the impacts of the dislocation in the labour market and the restrictions, with the ABS estimating that they bolstered household income by $48bn in the quarter. Given the limitations on spending opportunities, the household saving ratio surged from 3.6% to a 46-year high of 19.8%.
Key dynamics in Q3 | National Accounts — GDP
Household consumption — Retail consumption rebounded sharply over the quarter as the reopening provided more opportunities to spend and this was enhanced by household balance sheets that had been bolstered by the earlier fiscal support measures. However, the pace of the rebound was moderated by the return to shutdown in Victoria. Amid the presence of ongoing restrictions and precautionary behaviour, there have been large shifts in previously normal consumption patterns with spending in services-related areas remaining weak, though this has to some extent been substituted with increased goods-related consumption such as new vehicles and more in-home spending, while the share of purchases being made online continues to be significantly elevated on pre-pandemic levels.
Dwelling investment — Residential construction activity was supported by a modest rise in detached housing (1.1%), while alteration work advanced strongly (4.6%) in response to the traction from the Federal Government's HomeBuilder scheme. Attenuating this was a 6.2% contraction in private sector unit construction amid a difficult outlook due to low population growth and soft investor sentiment.
Business investment — Firms understandably remain reluctant to invest due to elevated uncertainty over the economic outlook and a focus on preserving capital during the pandemic crisis. Private sector capital expenditure contracted by 3.0% in Q2 and was accentuated by weakness in Victoria due to the shutdown.
Public demand — Public consumption spending increased further over the quarter (1.4%) after a sharper pandemic-induced lift (3.0%) in Q2. Underlying investment also advanced (2.7%), with infrastructure investment by the states and territories likely to ramp up as key projects are brought forward.
Inventories — A modest decline in Q3 followed the sharp run down that occurred over the first half of the year as the shutdown led to weak demand conditions and disruptions to trade. Inventories will contribute positively to GDP growth in Q3.
Net exports — Import volumes rebounded on the reopening of the economy with strong gains across consumption and capital goods, while exports declined reflecting weak demand conditions offshore. Net exports will subtract 2.0ppts from GDP growth in Q3.
