The Australian economy rebounded sharply as state-based lockdowns during the Delta wave were eased. Real GDP surged by 3.4% in the December quarter (4.2%Y/Y), slightly missing the median estimate for 3.5%, after output contracted by 1.9% in the lockdown-affected Q3. This rebound was on par with that seen in Q3 2020 when Australia was reopening from the national lockdown; a very strong outcome considering that the fall in output during the initial lockdown was much larger than during the Delta wave. Hours worked across the economy surged back by 4.3% in the quarter but fell short of returning to pre-Delta levels.
Importantly, the Australian economy returned to expansion after the disruptions in the previous quarter, with GDP reestablishing its pre-Delta momentum. After Q4's 3.4% rebound, GDP advanced to 3.4% above its pre-pandemic level. The Omicron wave was a headwind early in 2022, but despite some material disruptions caused by staff absences, the economy looks to have been more resilient than in earlier waves.
Household consumption was resurgent rising by 6.3% in the December quarter and drove the economic rebound. This more than reversed Q3's 4.8% contraction and saw household consumption recovering its pandemic-induced decline.
Strong levels of consumer sentiment, bolstered by the vaccine rollout, saw households confident in spending out of accumulated savings once the lockdowns had run their course. Fiscal support had boosted the household saving ratio to a very elevated 19.8% in Q3, with the resurgence in spending seeing this fall to 13.6% in Q4.
All categories benefitted, but discretionary consumption saw by far the largest rebound, swinging from -11.2% in Q3 to 14.2% in Q4. Much of this was in services, which lifted by 6.3% after falling by 5.8% in the prior quarter, though the category still remains below pre-pandemic levels (-3.9%). Compare this to goods consumption, which lifted to 8.8% above its end-2019 level after a 6.3% reacceleration in Q4, and a significant imbalance in consumption patterns persists relative to pre-Covid trends.
The robust rebound in consumer spending did prompt a rise in inflation pressures, with the household consumption deflator lifting from 1.8% to 2.3%Y/Y. This is close to an 8-year high but is still a moderate pace in the scheme of things.
Inventories were a key contributor to growth in the quarter (+0.9ppt), driven by a catch-up in wholesaler inventories that have been hindered by global supply chain pressures.
Public demand, a key support to the domestic economy through the pandemic, was broadly neutral in Q4.
Private investment weakened further in Q4 (-1.2%) for an overall decline of 1.6% over the back half of the year, but this weakness should prove temporary. During the first half of the year, private investment surged by 8.6% before business investment (-0.3%q/q) and residential construction (-2.2%) lost momentum amid the lockdown disruptions and capacity constraints. A vast pipeline of residential construction work and upward revisions made to forward-looking business capital expenditure plans should support a resumption of the earlier upswing in private investment, albeit uncertainty due to geopolitical tensions could be a cause for concern.
Net exports weighed modestly on Q4 GDP (-0.2ppt). Export volumes weakened (-1.5%) as resources shipments declined in response to softer global demand. A retracement in the iron ore price led to a 5.5% fall in the terms of trade in the quarter. Imports also contracted for the second quarter running (-0.9%), reflecting the factors that have driven the loss of momentum in private investment.
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