Australia's March quarter National Accounts are due to be published by the ABS next Wednesday (2/6). Currently, the median estimate is for the economy to have expanded by 1.1% in Q1. The recovery continued at pace in the December quarter with real GDP rising by a stronger-than-expected 3.1%, which followed the 3.4% rebound in the September quarter as the economy started to reopen. But with the economy contracting by 7.3% over the first half of 2020 under the weight of lockdowns and activity restrictions, GDP was still 1.1% lower than its pre-pandemic level from a year earlier.
With the nation's vaccine rollout only in its very early stages, snap lockdowns occurred in a few capital cities in the March quarter as a precautionary response to low rates of local transmission of the virus. However, the lockdowns were short in duration and restrictions were eased quickly after outbreaks had been contained ensuring the recovery was not derailed. Despite these setbacks, indicators of household activity and mobility showed that participation in a range of social and leisure activities was continuing to recover to pre-pandemic levels by the end of the quarter. More Australians were also returning to workplaces with the frequency of working home working arrangements declining from the peaks when the lockdowns were in place.
The widening reopening and eased activity restrictions were leading to a rebalancing of household consumption patterns. Areas of goods-related consumption, while remaining at much higher levels than prior to the pandemic, were now leveling out or slowing as spending on services was rising. High levels of accumulated savings, strong sentiment, the recovering labour market and wealth effects from rising asset prices were helping to drive growth in household spending.
Housing market activity continued to strengthen supported by low interest rates and stimulus measures from federal and state and territory governments. Additional incentives for first home buyers in a few states were driving very strong demand from that segment. House prices across the major capital city markets and in regional markets lifted further in the March quarter. On the supply side, the strong response to government programs including the HomeBuilder scheme and first home owner grants led to residential construction activity picking up further and the outlook was supported by detached house approvals rising to record highs.
With the heightened uncertainty that defined much of 2020 clearing to some extent through the reopening and the availability of vaccines, surveyed measures of business confidence and conditions had rebounded very sharply to sit at higher levels than prior to the pandemic. Equipment spending by businesses was surging to meet the rebound in domestic demand and as a response to the tax incentives first announced in last year's Federal Budget (and then extended in this year's Budget) that have greatly increased asset write-off provisions. In turn, this was supporting strong growth in import volumes, particularly for new vehicles and capital goods. Meanwhile, elevated commodity prices were generating tailwinds for national income and rural exports had surged following drought-breaking rain last year.
As it stands | National Accounts — GDP
The momentum generated by the reopening of the Australian economy was sustained in the December quarter with output expanding by 3.1% after the 3.4% rebound in the September quarter. Still, these outcomes left Australian GDP 1.1% below its pre-pandemic level and around 3.8% below its forecast trajectory based on the outlook in the RBA's February 2020 Statement on Monetary Policy. Domestic demand continued to drive the recovery, with household consumption again the leading contributor to growth in the quarter.
Offshore, growth in OECD economies slowed significantly to 1.0% in the March quarter from growth of 9.3% in the September quarter, largely stalling progress in the global recovery with containment measures being brought back to contain a resurgence in the virus. Quarterly output growth slowed sharply but was still positive in the US (1.1%) and UK (1.3%), though it contracted in the euro area (-0.7%) due to shutdowns being reinstated. China's economy continued to lead the global recovery, with GDP increasing by a further 2.6% in the December quarter.
In Australia, the containment of the virus, eased restrictions and the tailwinds from policy stimulus measures saw household consumption continuing to drive the recovery with a further 4.3% rise in the December quarter. Contributing significantly to this strength was Victoria where household consumption rebounded with a 10.4% surge on the state's reopening from its extended winter lockdown. The widening reopening across the nation led to increased opportunities for households to spend, reflected by growth in services consumption (5.2%) again outpacing growth goods consumption (2.8%). Strong rises in spending were recorded in transport (includes domestic travel) 19.3%qtr, hospitality venues and hotels 17.5%qtr, household services 11.8%qtr and recreation services 9.1%qtr. However, while goods consumption advanced further, services consumption was still 7.8% below its pre-pandemic level and this was continuing to weigh on the recovery in household consumption overall.
Strengthening conditions in the housing market and policy stimulus from low interest rates, the HomeBuilder scheme and other government incentives were combining to turn the tide in the residential construction cycle from the downturn of the past couple of years. Residential construction activity posted its strongest rise in more than 5 years advancing by 4.1% in Q4, with increases in new home building (3.4%qtr) and alterations (5.2%qtr). Improving domestic demand conditions were the catalyst for the early stages of a rebound in business investment (2.6%qtr) after several years of weakness. Equipment spending (8.1%qtr) was particularly strong following the expanded tax incentives included in last year's Federal Budget. Net exports were broadly neutral in Q4: exports had risen strongly due to a surge in cereal volumes following the ending of the drought and increased commodity shipments, though this was offset by rising import volumes reflecting the rebound in domestic demand.
Key dynamics in Q1 | National Accounts — GDP
Household consumption — The mix of household spending is rebalancing as the reopening widened out further, though the pace is likely to have moderated from the very strong rates of growth in the previous two quarters. Retail sales volumes declined by 0.5% in the quarter as more consumption opportunities became available in services-related areas, though snap lockdowns in several capital cities may have also been a factor. Household consumption continues to be supported by eased restrictions, the recovery in the labour market, high accumulated savings, strong sentiment and wealth effects from rising asset prices.
Dwelling investment — Residential construction activity surged higher in the March quarter as the HomeBuilder scheme and other policy stimulus measures gained traction. Private sector alteration work accelerated by 11.3% in the quarter, while new home building advanced by 4.1%, with the strength driven by the detached segment (10.2%).
Business investment — A sharp rebound in business confidence and trading conditions together with tax incentives for new investment led to growth in private sector capital expenditure stepping up in pace to a 6.3% rise in Q1. Leading the way is equipment spending, which surged up by a further 9.1% in the quarter following Q4's 7.3% rebound.
Public demand — Strength in public demand continues to be boosted by health-related spending in response to the pandemic, while the investment pipeline is expanding as states look to bring forward infrastructure projects.
Inventories — Global supply chain issues and key input shortages amid the strength in demand as economies reopen may lead to a run down in inventories following a -0.1ppt contribution in Q4.
Net exports — The rebound in domestic demand conditions is driving strong growth imports, while expanded tax incentives for businesses are also assisting. Rural exports were strong again in Q1 as the drought-breaking rain of last year has led to a very strong cereal harvest, while resource exports look to have risen a little further as commodity prices continued to surge.