Momentum in the recovery of the Australian economy from the onset of the covid-19 pandemic was sustained in the December quarter as real GDP exceeded the top end of the range of market estimates in rising by 3.1%. The reopening of the economy set the recovery in motion with activity rebounding by 3.4% in the September quarter.
At the peak of the crisis, GDP had contracted by 7.3% from its pre-pandemic level at the end of 2019, though a strong 6.6% rebound over the second half of the year has now moderated the decline through the year to -1.1%. However, based on the forecast path in the RBA's February 2020 Statement on Monetary Policy, real GDP at the end of 2020 was around 3.7% below where it was anticipated to be in the absence of a significant shock from the pandemic.
In a global context, the impact of the pandemic was much less severe on the Australian economy over the first half of the year than in many other countries. The containment of the virus over the second half enabled the recovery in Australia to take shape through a sustained reopening, whereas offshore the pandemic and associated restrictions have continued to weigh heavily. Variant strains of the virus saw caseloads rising sharply over the Northern Hemisphere winter prompting the reintroduction of shutdowns in the UK and Europe, which has led to backsliding in the recoveries of those economies before the rollout of vaccines can change the course later on in 2021. Fewer restrictions meant that the US economy was more resilient, though output growth still slowed sharply in Q4 relative to Q3. Progress in the distribution of vaccines and additional fiscal stimulus supports a robust US outlook for 2021. Outperforming in the recovery has been the Chinese economy with activity now sharply above pre-pandemic levels led by the industrial sectors, with key commodity prices moving higher in response; a boost for Australian national income.
From late October, the state of Victoria was unlocked from its 3-month-long shutdown to contain a second wave of the virus, while across the rest of the nation low caseloads allowed more restrictions to be rolled back. Reflecting these developments and a reduction in precautionary behaviour, indicators of mobility recovered to their highest levels since the early stages of the pandemic, with measures tracking retail and leisure activities leading as a wider range of opportunities for households to spend became available again.
The ongoing reopening also contributed to further progress in the recovery in the labour market, with employment approaching its pre-pandemic level after it had collapsed by 6.7% at its trough. Victoria's reopening drove the momentum over the quarter as employment in the state rebounded sharply to broadly align with the levels across the other states. Hours worked have also continued to rise in an economy now much less restricted, advancing by 3.3% in Q4 following on from the 4.8% rebound in Q3. While the unemployment rate was still elevated at the end of the year (6.6%) it had declined sharply from its earlier peak in July (7.5%).
Notable in the December quarter was the very sharp rise in consumer sentiment reflecting confidence in the ability of the health authorities to keep the pandemic contained and allow the economy to remain open, improving labour market conditions and the strength of the monetary and fiscal stimulus response that was now working to boost spending after supporting households through the shutdowns.
An encouraging aspect of the 3.1% rise in GDP in Q4 was that it was more broad based in composition than in Q3 where activity rebounded by 3.4%. Household consumption continued to lead the way rising by 4.3% nationally, which incorporates a 10.4% surge in spending in Victoria as the state reopened. This strength in household consumption was sustained despite aggregate real income contracting in the quarter (-3.3%) on the tapering of fiscal support, with ABS analysis reporting that payments through the Federal Government's JobKeeper (wage subsidy) scheme had stepped down to $11.9bn in Q4 from $35.8bn in Q3. Fiscal support and the effects of shutdowns had earlier seen the household saving ratio elevate to a record high in Q2 (22.0%) and this was now being drawn on to support spending with the economy opening up more widely. Meanwhile, policy stimulus from Federal and State Governments was key in turning around earlier weakness in the residential construction cycle as activity in the sector posted its best outturn in more than 5 years, with new home building and alteration work on the rise. Business investment saw its strongest quarter since Q3 2017 after the instant asset write-off threshold was lifted to $150k from $30k in last year's Federal Budget and access was greatly expanded to include firms with turnover of less than $500m from $50m previously. There was also good news from the agricultural sector, with farm GDP surging by 33.3% in Q4 as favourable seasonal conditions drove grain output after drought breaking rain at the start of the year. All in all, with the economy still left with a sizeable output gap from the covid shock, the rollout of the vaccine and policy support remains key. The RBA reiterated its commitment to its 3-year yield target at its March meeting and maintained the guidance that the cash rate was expected to remain at 0.1% "until 2024 at the earliest", while it expanded its quantitive easing program by $100bn earlier this year.
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GDP — Q4 | Expenditure: GDP (E) 3.0%q/q, -1.1%Y/Y
Household consumption (4.3%q/q, -2.7%Y/Y) — The economic recovery continues to be driven by the rebound in household consumption, which lifted by a further 4.3% in Q4 as a wider reopening led to more opportunities to spend, though it was still 2.7% lower through the year. Overall, household consumption contributed 2.3ppts to the 3.1% rise in real GDP in Q4.
Dynamics around the mix of household consumption in Q4 extended what was seen in Q3, with the areas most heavily affected by the earlier restrictions over the first half of the year leading the rebound. Services consumption advanced a further 5.2%q/q on strength in transport (19.3%), hotels, cafes and restaurants (17.5%), personal services (11.8%) and recreation and culture (9.1%) but was still well below its pre-pandemic level (-7.8%Y/Y). Goods consumption expanded by 2.8% in the quarter taking it further above its level at the end of 2019. Substitution effects have contributed to this strength, with spending diverted away from services still heavily restricted such as overseas travel into new vehicles (22.2%Y/Y), household goods (11.3%Y/Y) and clothing and footwear (5.2%Y/Y).
Real growth in household disposable income pulled back by 3.3% in the quarter as the eligibility for the Federal Government's JobKeeper wage subsidy scheme was tightened and the level of payments was lowered, but growth through the year was still strong at 4.5%. With aggregate income contracting, the lift in household consumption resulted in a decline in the saving ratio from 18.7% to 12.0%. Overall, the high level of saving still has Australian households well placed to sustain robust consumption growth as fiscal supports are wound back further.
Dwelling investment (4.1%q/q, 0.6%Y/Y) — Residential construction activity posted its strongest quarterly outturn in more than 5 years rising by 4.1% to be up slightly on its pre-pandemic level (0.6%). Policy stimulus has been key in turning the cycle after a stretch of 8 consecutive quarterly contractions between mid-2018 to mid-2020. The Federal Government's HomeBuilder grants, state government incentives for first home buyers and low interest rates spurred new home building to a 3.4% rise in Q4 (-5.1%Y/Y) and alterations advanced a further 5.2% (10.6%Y/Y) after surging by 7.6% in Q3. Meanwhile, buoyant conditions in the established housing market in which capital city house prices were rising again after declining through the middle of the year drove ownership transfer costs—fees associated with real estate transactions—substantially higher in Q4 (15.2%), which contributed 0.2ppt to GDP growth.
Business investment (2.6%q/q, -5.1%Y/Y) — Though the pandemic and associated uncertainty has hit firms' investment spending and forward-looking plans hard, a bright spot emerged in the December quarter. Business investment lifted by 2.6% in Q4—its strongest quarterly rise in more than 3 years—led by a surge in demand for machinery and equipment (8.1%q/q) in response to the greatly expanded tax incentive measures included in the most recent Federal Budget, though the category is still 4.8% lower through the year. Meanwhile, non-residential construction remained weak in Q4 (-0.9%) having fallen by 5.9%Y/Y. There has been some improvement in investment plans based on the recent ABS Capital Expenditure survey, though the outlook, particularly offshore, is still highly uncertain.
Public demand (1.0%q/q, 6.5%Y/Y) — Spending associated with the health response to the pandemic continued to drive public consumption, rising by a further 0.8% in Q4 to be up by 7.4% through the year. Underlying investment advanced by 1.8% in the quarter following on from a 2.9% rebound in Q3 and is expected to contribute more significantly to output growth over the year ahead as state governments rollout capital spending plans outlined in recent budgets.
Net exports (-0.1ppt in Q4, -1.0ppt yr) — Reopenings in economies offshore helped drive export volumes up by 3.8% in Q4, with rural goods rising due to better seasonal conditions after the earlier drought, though resources exports only lifted modestly. Import volumes continued to advance on the domestic recovery (4.9%q/q), led by consumption and capital goods. Services trade remains heavily affected by the international border closures.
Inventories (-0.1ppt in Q4, 0.1ppt yr) — After contracting sharply over the first half of the year in response to the weak economic conditions, inventory levels stabilised over the second half. The 0.1ppt subtraction to growth in Q4 comes after a 1.0ppt contribution in Q3.
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GDP — Q4 | Incomes: GDP (I) 3.3%q/q, -1.3%Y/Y
The December quarter real GDP income estimate lifted by 3.3% after rebounding by 3.4% in Q3; this latest outcome reducing the decline through the year to -1.3% from -3.9%.
Since plunging by 7.5% in the June quarter when the shutdown hit incomes hard, Australian nominal GDP has rebounded over the reopening phase rising by 4.0% in Q3 and then by a further 4.2% in Q4. This latest outcome turned the annual pace positive to 0.6% from -3.7%.
Supporting national income in the December quarter was the effect of rising commodity prices as global activity came back online, with industrial demand in China notably strong. In response, the nation's terms of trade accelerated by 4.8% in the quarter, which swung annual growth to 7.3% from -2.1%.
The extent of fiscal support being delivered to the economy was wound back in the December quarter reflecting tightened eligibility criteria for the JobKeeper wage subsidy scheme with lower payments and reduced cash flow support for businesses. Government taxes less subsidies lifted to an in-take of $27.7bn after around $64bn in policy support measures had been delivered into the economy over Q2 and Q3. The tapering was reflected through the 2.2% contraction in total factor income in the quarter, though it was still 5.3% higher than a year earlier.
Analysis from the ABS reports that JobKeeper payments were $11.9bn in the December quarter; some $23.9bn lower than in the September quarter, while support under the Boosting cash flow for employers initiative declined to $6.7bn in Q4 from $13.5bn in Q3. Accordingly, reduced government transfers weighed on business profits. Private sector non-financial corporations profits pulled back by 7.5% in Q4, lowering annual growth to 11.7% from 18.2%. Gross mixed income fell by 12.7% (13.6%Y/Y), with the larger retracement reflecting the fact that small businesses had been the major beneficiaries of the government transfers. Movements in financial corporations' profits have been much more subdued, rising by 0.9% in Q4 to be up by 2.1% through the year having been restrained by weak demand for credit and low interest rates.
Improving labour market conditions has helped drive growth in wages and salaries, which advanced by 1.5% in Q4 after rising by 2.4% in the previous quarter. This increased growth through the year to 2.0% from 1.4%. The 1.5% rise in wages compares with a 3.3% lift in hours worked across the economy in the December quarter.
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GDP — Q4 | Production: GDP (P) 3.1%q/q, -1.0%Y/Y
The December quarter's GDP production estimate came in at 3.1%, as the contraction through the year moderated to -1.0% from -3.6%. The service sectors continued to recover through a wider reopening with more restrictions being eased, with gross value added across these industries rising by 3.7% after Q3's 5.1% rebound to be 1.1% lower through the year. Goods-related industries also saw gross value added rise but at a slower pace of 1.2% in the quarter (-3.4%Y/Y).
Within the service sectors, household services followed up its 9.1% rebound in Q3 with a further 3.2% lift in Q4 as eased restrictions saw demand for personal services (9.9%), hotels, cafes and restaurants (7.9%) and recreation and culture activities (8.5%) continue to recover, though overall it was still 1.6% lower than its pre-pandemic level. Business services posted a 4.0% gain in Q4, with professional services (4.7%) and activity in real estate (7.4%) improving further, taking the category to within 0.7% of its level at the end of 2019.
The agriculture sector saw gross value added in Q4 surge up by 26.8% (20.0%Y/Y), adding 0.5ppt to GDP growth in the quarter as favourable seasonal conditions after the earlier drought led to a strong grain harvest (84.4%Y/Y). This had spillover effects through the supply chain, reflected by the 4.5%q/q rise in the goods distribution sector with transportation (6.1%) and wholesalers (3.6%) the beneficiaries. Meanwhile, the goods production sector was weak in Q4 (-0.2%) weighed by mining (-1.0%) and utilities (-0.9%).
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GDP — Q4 | Prices
There was little impulse from prices in the December quarter. While economy-wide inflation through the GDP deflator picked up by 1.1% in the quarter and the annual pace elevated to 1.8% from 0.1%, there are a couple of points to highlight. Firstly, this captures the impact of the strong boost in the terms of trade, and secondly, a low base effect accelerated the annual rate. Adjusting for the terms of trade impact, the gross national expenditure deflator was broadly flat in Q4 (0.1%), while the annual pace eased to 0.4% from 0.8%.
Similarly, the household consumption deflator—the closest proxy in the national accounts to the Consumer Price Index (CPI)— was 0.2% higher in Q4, though the pace through the year softened from 0.5% to a 57-year low of 0.3%. The headline CPI measure on a seasonally adjusted basis came in at 0.9%Y/Y in the December quarter.
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GDP — Q4 | Productivity
Hours worked across the Australian economy continued to rebound in Q4 with a 3.3% rise following Q3's 4.8% lift. Overall, hours worked increased by 8.3% over the second half of the year, though this was after collapsing by 10.9% through the first half. Compared with pre-pandemic levels, hours worked were still 3.5% lower, while in the market sector they remain down by 5.0%.
The rise in hours worked in Q4 of 3.3% was almost in line with the increase in output (3.1%), with GDP per hour worked holding flat in Q4 (2.5%Y/Y). Growth in GDP per capita advanced by 3.0% in the December quarter, though it was 1.8% down on its pre-pandemic level at the end of 2019.
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GDP — Q4 | States
The key dynamic in the Q4 quarter was the reopening in Victoria from its shutdown over August to late October, which contributed in the order of 1.6ppts to national GDP growth. Victorian state demand rebounded 6.8% on the reopening effort, though it still contracted by 3.4% over 2020 to vastly underperform the rest of the nation. Household consumption surged in the state rising by 10.4% in Q4 (-7.2%Y/Y), albeit from a very weak base after declining in each of the first 3 quarters of the year. Also supporting the rebound was residential construction (3.0%q/q) and business investment (6.1%q/q), with the latter led by machinery and equipment (14.6%q/q). Strength in public demand over the past year (9.1%) has helped attenuate the impact of the pandemic crisis on the state economy.
State demand in New South Wales posted a 2.9% rise in Q4, reducing the decline through the year to -0.7% from -3.1%. Household consumption extended its 10.4% rebound in the previous quarter with a 3.1% lift in Q4 but was 3.4% lower through the year. Activity in residential construction advanced by a further 2.1%, though this has been weighted towards alteration work. Business investment lifted by its most in a single quarter in more than 3 years with a 3.8% rise in Q4 as machinery and equipment spending surged by 15.4%. Meanwhile, public demand remains a source of strength rising by a further 1.3% to 6.6%Y/Y.
For the other states, the Queensland economy continued to outperform with state demand firming by 2.0% in Q4 to be 2.4% higher through the year. Household consumption was solid posting a 2.3% lift, though it was in residential construction where the strength really stood out through a 9.6% surge in activity on the back of policy stimulus. It was a subdued tone in South Australia where state demand was 0.6% higher in Q4 but flat over the year. Household consumption growth was modest at 0.9%q/q and while residential construction lifted 2.6%q/q, business investment was weak (-4.3%), centred on non-residential construction. Western Australian state demand advanced by 1.4% for the quarter to be 1.2% higher through the year. The pace of household consumption growth (0.3%) was softer than in the other states and has yet to return to pre-pandemic levels (-1.6%) despite fewer disruptions from the pandemic. Meanwhile, residential construction rose very sharply (8.9%) with additional incentives available in the state for first home buyers. State demand in Tasmania lifted 3.3% in Q4 to be up by 1.5% for the year. There were strong gains across residential construction (9.2%) and business investment (7.6%) as household consumption remained supported (2.4%).
