Australia's National Accounts for the June quarter are due to be published by the ABS today (11:30am AEST). Economic growth is expected to have slowed in Q2, with the median estimate at 0.4%, though the annual pace will surge as the historic 7% contraction from the depths of the pandemic falls out of the calculation. The economic recovery from the COVID recession extended into 2021 as real GDP expanded by 1.8% in the March quarter following a 6.8% rebound over the second half of last year.
In Q1, output had rebounded to be 0.8% above its pre-pandemic level and this transition from the recovery to the expansion phase continued in the June quarter. However, headwinds from the Delta variant would emerge towards the end of the period, disrupting this trajectory significantly. A two-week lockdown occurred in Victoria between late May and early June, while the lockdown in greater Sydney commenced in late June. Back in April, there was a snap 3-day lockdown in Perth. Momentum in high-frequency indicators tracking household activity and mobility started to weaken towards the end of the quarter, reflecting the lockdown in Victoria and the emerging concerns associated with Delta in New South Wales. Vaccinations were gradually rising over the quarter following the commencement of the program in late February.
Household spending patterns were continuing to rebalance over Q2, with dining out and sales of clothing and footwear and recreational goods benefitting from eased restrictions. Areas supported by lockdowns, such as household goods and food, were moderating from elevated levels earlier in the pandemic. The dynamics for household spending remained highly supportive with sentiment strong, interest rates very low, high accumulated savings and robust labour market conditions as the unemployment rate fell to its lowest level in a decade.
Conditions in the major housing markets remained robust with housing prices increasing at an accelerated pace in the capital cities and in regional areas. The upswing in residential construction activity stalled during Q2, potentially reflecting supply constraints due to the surge in demand brought forward from the HomeBuilder scheme and first home buyer incentives. Business investment maintained strong momentum as it continued to rebound from the COVID recession. Strong domestic demand conditions were encouraging firms to invest, supported by tax incentives, accommodative financing conditions and high sentiment. Reflecting these dynamics, import volumes continued to advance, though resources exports were disrupted by adverse weather during Q2; in turn, net exports subtracted from overall activity in Q2. National income continued to be boosted by surging prices for iron ore and other commodities as well as for many rural exports.
As it stands | National Accounts — GDP
A key milestone in the recovery was reached in the March quarter as Australian GDP lifted to be 0.8% above its pre-pandemic level. Output growth expanded for a third consecutive quarter since the national reopening with GDP rising by 1.8% in Q1 as growth through the year turned from -1.0% to 1.1%. Household consumption rebounded strongly over the second half of last year to drive the recovery as more opportunities to spend became available. However, in Q1 the main driver of growth was private investment, reflecting stimulus measures to support residential construction and business investment.
Offshore, a resurgent virus was weighing on economic recoveries. Growth across OECD economies slowed further in Q1 to 0.6% from 1.1% in Q4 — this coming after Q3's reopening surge of 9.4%. Output in the UK (-1.6%) and euro area contracted (-0.3%) in the March quarter, weighed by lockdowns and tighter restrictions. Growth in the US economy remained resilient to the pandemic — the pace lifting to 1.5% from 1.1% in Q3 — supported by large-scale fiscal and monetary stimulus. Output in China moderated to growth of 0.4% in the March quarter but GDP was now 7.1% higher than pre-pandemic levels.
Turning back to Australia, growth in household consumption moderated to 1.2% in Q1, remaining 1.5% below its pre-pandemic level. Spending patterns were continuing to adjust to the reopening with services rebounding further (2.4%q/q) as goods spending declined (0.5%q/q), though the latter remained elevated compared to pre-pandemic levels. Accumulated savings were continuing to support household spending. Consumption growth was stronger than the rise in real disposable income in the quarter (0.5%), prompting a reduction in the saving ratio from 12.2% to 11.6%.
Private investment increased strongly rising by 5% for the quarter, driving it to around 3% above pre-pandemic levels. The residential construction cycle was in the midst of a strong upswing — activity in Q1 lifted at its fastest pace in 17 years rising by 6.6% — with alterations (10.8%q/q) and new home building (3.5%q/q) surging in response to the HomeBuilder scheme, low interest rates and rising housing prices. Business investment continued to rebound lifting by 3.6% in the quarter after a 2.3% lift in Q4 but was still below the weak levels that prevailed prior to the pandemic. The impulse was coming from equipment spending (10.3%q/q) with businesses capitalising on tax incentives as they responded to strong demand with the economy rebounding. Reflecting this, imports (3.7%q/q) were continuing to expand at a faster pace than exports (0.5%q/q), leading to net exports weighing on overall activity in Q1 (-0.6ppt).
Key dynamics in Q2 | National Accounts — GDP
Household consumption — Solid momentum was maintained in household consumption in Q2, with high-frequency card data indicating that this was continuing to be led by services spending. Retail sales volumes advanced by 0.8% in Q2 with the strongest categories being dining out at cafes and restaurants (3.9%) and clothing and footwear (3.0%), pointing to the effects of eased restrictions and the boost to discretionary demand from fiscal and monetary stimulus and strong household balance sheets.
Dwelling investment — The upswing in the residential construction cycle stalled in the quarter as both new home building (-0.1%) and alteration work (-0.6%) declined. Supply constraints may have been a factor given the surge in demand over recent quarters driven by stimulus from the HomeBuilder scheme, first home buyer incentives and low interest rates.
Business investment — Strong momentum in capex spending continued in Q2, rising by 4.4% in the period. Equipment spending (4.3%q/q) advanced further, surging 10% above pre-COVID levels. The rebounding economy, upbeat sentiment, accommodative financing conditions and tax incentives remained the drivers for business investment.
Public demand — Robust growth in public demand continued in Q2, supported by rising consumption spending (1.3%) and underlying investment (4.4%). Public demand is expected to add 0.7ppt to quarterly GDP.
Inventories — Strength in the recovery and the rebound in domestic demand conditions led to a rebuild in inventories in Q1 from their very low levels during the COVID recession last year. However, the rebuild stalled in Q2.
Net exports — Following a -0.6ppt contribution in Q1, net exports subtracted 1.0ppt from activity in the June quarter. Demand for imports remains strong in line with the recovery in the domestic economy, while resource exports were impacted in Q2 by adverse weather conditions and maintenance work.
