Macro (Re)view (3/12) | Australia set for Q4 rebound

With much of the nation locked down in the Delta-affected September quarter, the Australian economy contracted by 1.9%q/q. Although the decline was less severe than forecast (-2.7%), this was a significant disruption to an expansion phase that was full of running after earlier recovering from the 2020 Covid recession, with Australian GDP backsliding to be 0.2% below its pre-pandemic level. All indications are that the economy will more than rebound in Q4, but this was an unwelcome setback that has delayed the timing of the recovery and added to existing supply/demand pressures.

Household consumption was down 4.8% for the quarter, its second largest fall on record, as spending fell away by 8.4% in the jurisdictions in lockdown across New South Wales, Victoria and the Australian Capital Territory. Consumption of services was crunched by 5.8%q/q as hospitality and entertainment venues were heavily restricted. A smaller decline in goods consumption (-3.3%q/q) is typical of the redistribution of spending that occurs during lockdowns, in particular with online spending receiving a large boost. A key dynamic is that with the lockdowns curbing spending and with governments supporting incomes, the household saving ratio surged to 19.8% to be close to the record highs seen in 2020. With the pace of monthly retail sales accelerating from 1.3% in September to 4.9% in October (review here), households were clearly spending some of their accumulated savings once the lockdowns were lifted. This is likely to keep momentum in household spending rolling for some time into next year. However, it will also be important to consider where the spending occurs, which in large part depends on how the Covid situation and associated restrictions evolve, particularly given that the risks to the inflation outlook are to the upside. Before Q3, there was already a large imbalance between goods and services spending and this has been accentuated by the Delta setback.  

Also a headwind to the domestic economy in Q3 was inventories (-1.3ppt), which became depleted due to pressures in global supply chains and associated product shortages. Business investment fell (-1.1%q/q) as firms delayed equipment spending during lockdowns, though forward-looking indicators suggest this will be deployed over the remainder of the financial year rather than being foregone. Restrictions on construction work and capacity constraints from labour and materials shortages stalled the upswing in the residential construction cycle in Q3. Bolstering the economy from a larger fall in output was a strong contribution from public demand (0.9ppt) as the vaccine rollout was stepped up. Net exports swung from a headwind in Q2 to add 1ppt to Q3 activity, but on weak detail with imports falling sharply. My feature-length review of the Q3 national accounts with analysis and charts can be accessed here. 

In other developments this week, housing prices nationally were up by a further 1.3% in November to 22.2%yr. Rising affordability pressures and the ending of construction subsidies are curtailing the owner-occupier segment where a 4.1%m/m fall drove an overall contraction of 2.5% in monthly housing finance commitments (review here). Investor commitments remain on the rise and sit just off record highs, though credit growth to the segment (3% 6mth annualised) is running at less than a third of the pace seen for owner-occupiers (10%). An unwind from a recent rise in the higher-density segment saw dwelling approvals down 12.9% in October (review here). The trade surplus narrowed in October but remained high at $11.2bn on the support of elevated commodity prices (review here), which is also the key dynamic behind the rise in the nation's current account surplus to a record high in Q3 at 4.4% of GDP (review here).  

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Offshore, many questions around Omicron remain unanswered but markets are on the move regardless. In the US, with momentum in the economy strong and inflation elevated, Federal Reserve Chair Jerome Powell said during a Senate testimony appearance this week that the FOMC would discuss accelerating its QE taper process "by a few months" at its upcoming meeting. The minutes from the previous meeting, where the Committee announced the taper, had already put this on the table in which "some participants" had argued for QE to be wound up sooner than its guidance implied for the middle of next year. Markets are taking a faster taper as a sign that the timing for rate hikes is also coming forward, with the yield curve flattening on the back of this, and this conviction appeared to be bolstered by Chair Powell saying that the Fed would move away from its characterisation of inflation pressures as transitory. A strong nonfarm payrolls report rounded out the week and indicated a December acceleration of the taper is likely. While there was a large downside miss on payrolls in November at 210k against 550k expected other aspects pointed to a tightening in the labour market. The unemployment rate fell from 4.6% to 4.2% and underemployment declined from 8.3% to 7.8%, with both measures at their lowest levels since the onset of the pandemic. Participation lifted slightly in the month to 61.8% but remains well below the level that prevailed before Covid at around 63%. If this lower level of participation persists, even decent employment outcomes (such as November's) have the potential to drive the unemployment rate a lot lower. 

Over in Europe, November's inflation print came in well above estimates with the headline rate rising from 4.1% to 4.9%yr (vs 4.5% exp), its fastest since the introduction of the single currency. The core rate was left pushing record highs after elevating to 2.6%yr (vs 2.3%) from 2%. Increasing price pressures are coming mainly on the back of surging energy prices (27.4%yr) due to shortages. However, both non-energy industrial goods (2.4%yr) and services (2.7%yr) also advanced pointing to a broadening of inflation pressures, though there is some statistical volatility driving the latter. With the pace of inflation expected to ease back in 2022, ECB President Christine Lagarde again reiterated this week that the prospect of rate hikes next year was an unlikely outcome. But ahead of the next ECB Governing Council meeting in a couple of weeks, speculation continues on the path forward for the Pandemic Emergency Purchase Programme. The key issues are whether Omicron will delay the ECB's guidance for net purchases to end in March and, when the net purchases do eventually end, how it might go about smoothing out the process to prevent yield spreads from widening too severely.

Australian retail sales surge 4.9% in October

Australian retail sales increased at their fastest pace in 11 months as spending in New South Wales surged following the end of the extended Delta lockdown in the state. The 4.9% rise in October returned national retail turnover to its pre-Delta level ahead of what is shaping up to be a strong end to the year for the sector. 

Retail Sales — October | By the numbers 

• National retail sales lifted by 4.9%m/m in October, in line with the preliminary estimate, to $31.1bn to be broadly back at pre-Delta levels. In September, sales advanced by 1.7%m/m. 
• 12-month retail sales accelerated to 5.2% from 1.2% in September. 

Retail Sales — October | The details  

In September, retail sales had returned to growth (1.3%m/m) after declining by 6% over the period between May and August. The ending of lockdowns then drove an acceleration in the pace in October to 4.9%, its sharpest month-on-month rise in 11 months. Retail sales are now back to their level prior to the winter lockdowns and remain elevated on their pre-pandemic trend. 

The wider reopening of the retail sector in NSW led to turnover in the state surging by 13.3% in the month. This accounted for 80% of the lift in national turnover. Sales in Victoria (3%) and the ACT (20.2%) rebounded as restrictions were eased, though the former is set to see a much larger rise come through next month as non-essential retailers in Melbourne were not permitted to reopen until November. Elsewhere, turnover was up slightly in Queensland (0.4%) and Western Australia (0.2%) but fell in South Australia (-1.2%) and Tasmania (-2.4%).  

In NSW, spending ripped higher in the categories that were hit hard during the lockdown including; clothing and footwear 90.4%m/m, department stores 83.7%m/m, cafes and restaurants 29.4%m/m and household goods 17.1%m/m. 

Similar trends can be expected in Victoria in November. One major difference, though, is household goods with the category not seeing anything like the falls up in NSW during its Delta lockdown. Perhaps, out of necessity, these retailers in Victoria were more accustomed to operating in lockdowns through online sales and click and collect services etc. Note that in the '2nd wave' 2020 lockdown in Victoria, household goods were off heavily but that was not the case this time around.       

With the shops opening up again, online sales pulled back for the first time since May posting a 5.6%m/m decline in October but were still at tremendously elevated levels. Between May and September, online sales soared by 58.4%. There were declines in both the non-food (-5.6%) and food (-5.3%) segments in October. 

Retail Sales — October | Insights

The uplift in retail sales growth from 1.3% in September to 4.9% in October highlights that household spending rebounded strongly once lockdowns had run their course, supported by the run-up in accumulated savings reported in yesterday's Q3 national accounts (see here). High-frequency card data indicates the momentum has continued through November, with Black Friday sales providing an additional tailwind in the lead-up to Christmas. Mobility data backs all this up, with national retail foot traffic now back around pre-pandemic levels.  

Australia's trade surplus narrows to $11.2bn in October

Australia's trade surplus narrowed for a second successive month to $11.2bn as it moderates from August's record high. Declining iron ore prices weighed on export earnings while weakness in the domestic economy around the time of the Delta lockdowns saw import spending fall. 

International Trade — October | By the numbers

• Australia's trade surplus narrowed by $0.6bn in October to $11.2bn, coming in broadly as expected by markets. The surplus from September was revised down from $12.2bn to $11.8bn. 

• Export credits were down 3.3% on the month to $43.1bn (prior: -6.7%m/m), with annual growth slowing to 20.7% from 31.5%.  
• Import spending contracted by 2.7%m/m to $31.8bn (prior: -3%m/m) to be up 9.5% over the year (from 16.6%). 

International Trade — October | The details

The narrowing in the trade surplus in October was driven by export earnings (-$1.5bn) falling by more than the decline in import spending (-$0.9bn). In percentage terms, exports were down 3.3%mth on the back of a 6.7% fall in September, to be running at 20.7%yr. Imports fell 2.7%mth after contracting by 3% in the month prior but are up 9.5%yr. 

The fall in export earnings in October centred on weakness in non-rural goods (-6.7%m/m). This was driven by a 22.5% fall in earnings from iron ore exports following on from declines of 5.4% in August and 17.2% in September as prices for the commodity retrace from elevated levels. However, LNG (8.8%) and coal (13.7%) provided some offset on rising prices. Rural goods advanced by 2.9%mth and are up nearly 60% over the year on strong global demand for Australian wool, cereals and meat. Services exports declined in October (-5.8%) and remain at very low levels due to the restrictions on inbound tourism.

Turning to imports, spending was down on broad-based declines in October. Capital goods were down the most (-7.9%m/m) and may be reflecting the hit to business investment seen during the Delta lockdowns. Consumption goods fell by 1.5%mth on weakness in food and beverage (-6.9%m/m) and household electrical items (-19.4%m/m). Spending on intermediate goods was a touch weaker in October (-0.7%m/m) but the category is up 31.5% over the year. Services imports declined by 1.6%m/m and are around 50% below pre-pandemic levels with overseas tourism prohibited.  

International Trade — October| Insights

Net exports added 1ppt to Q3 GDP growth, bolstering the Australian economy against a larger fall in output than the 1.9% contraction posted (see here). With a robust reopening in train, this should be supportive for imports to re-establish their earlier upswing. Meanwhile, demand for Australia's commodity and rural exports remains strong as the global economy continues to recover.

Australian housing finance down a further 2.5% in October

Australian housing finance commitments declined by 2.5% in October to be down by around 9% since the middle of the year. The Delta lockdowns and fading tailwinds from stimulus measures have weighed on activity over the period. As owner-occupier commitments continue to retrace from cycle highs, investors are advancing with commitments to the segment pressing record levels. 

Housing Finance — October | By the numbers

• Housing finance commitments ($ value, ex-refinancing) declined by 2.5%m/m in October to $29.6bn (prior: -1.4%) against expectations for a 2% rise. Growth over the year eased to 32.2% from 35.5%.  
• Owner-occupier commitments were down 4.1% in the month to $19.8bn (prior: -2.7%) for an annual rise of 15.1% (from 20.8%).  
• Investment commitments lifted by 1.1%m/m to $9.7bn, with annual growth steepening from 83.2% to 89.6%.
• Total refinancing activity was a touch softer falling by 0.4% in October to $16.1bn (prior: -9.1%) but is up by a third over the year.  

Housing Finance — October | The details 

Housing finance commitments were down for a third month running with October's 2.5% fall following declines of 4.3% in August and 1.4% in September. A range of stimulus measures including construction subsidies, incentives for first home buyers and low interest rates in a backdrop of rising housing prices set up a cracking pace in commitments from mid 2020. This is now in the process of unwinding as some of the stimulus measures have ended. 

The main macro theme playing out is that owner-occupiers are pulling back from the market while investor activity is on the rise. As the chart below shows, the slowing in the owner-occupier segment is broad based across upgraders (-3.7%mth), first home buyers (-4.8%mth) and in the construction-related area (-7.1%). The ending of construction subsidies and the strong run-up in housing prices stretching affordability are key factors in the slowdown. 

The approvals data (counting the number of loans written by lenders) is mirroring the trends seen in commitments.  

Investor commitments lifted to $9.7bn in October, their highest level since April 2015. The rise in housing prices, tightening conditions in some key rental markets and low interest rates are supportive fundamentals for the segment. 

Across the states, the key detail was a sharp decline in owner-occupier commitments in New South Wales (-8.4%m/m). First home buyer commitments in the state were also 5.3% lower. This may be reflecting volatility associated with the Delta lockdown. Victoria, also in lockdown, fared better in October with owner-occupier commitments up 2.6%, though they had fallen by 17.1% over the previous two months on the impact of restrictions.  

Activity in the refinancing market broadly held at the elevated levels seen in the previous month at around $16.1bn. The decline in official interest rates and the introduction of the RBA's Term Funding Facility drove a run-up in refinancing since March of last year as borrowers sought out lower rates when fixed-rate periods on their mortgages came to an end.  

Housing Finance — October | Insights

Lockdown effects and the withdrawal of stimulus measures weighed on housing finance commitments in the month, though investor commitments remain on the rise with the backdrop of supportive fundamentals. Contributing significantly to the slowdown in the owner-occupier activity is a cooling first home buyer segment. Aside from the withdrawal of stimulus, with housing prices nationally up 22.2% over the year to November according to the latest release from CoreLogic, affordability has come under pressure. 

In review: Australian Q3 GDP: Expansion set back by Delta lockdowns

The lockdowns in place across large parts of Australia over the winter following outbreaks of the Delta variant of Covid-19 led to a significant deterioration in economic conditions. Real GDP contracted by 1.9% in Q3 and while this was an upside result relative to the market consensus for a 2.7% fall, it was still the nation's third largest quarterly contraction on record. Growth through the year slowed to 3.9% from 9.5%.     

Ahead of the Delta lockdowns, the Australian economy had established very strong momentum. Activity had advanced by 2.5% through the first half of the year and real GDP was 1.8% higher than its pre-pandemic level at the end of 2019. With the lockdowns sharply disrupting this momentum, the associated contraction in Q3 led to a backsliding of the expansion phase, with real GDP falling to 0.2% below its pre-pandemic level.   

Aside from the deterioration in the domestic economy, conditions offshore were also a headwind during Q3. Recoveries across the globe slowed due to the rise of the Delta variant, while supply constraints and the persistence of related inflation pressures intensified. GDP growth across OECD economies is estimated to have slowed to 0.9% in Q3 from 1.7% in Q2. Outside of the US and China, GDP remained below pre-pandemic levels in most economies. The US economy slowed sharply in Q3 (0.5%) as the Delta variant weighed on household services consumption and goods spending contracted due to a large fall in vehicle purchases amid supply shortages. Summer reopenings following earlier vaccination rollouts continued to drive activity in the euro area (2.2%) and in the UK (1.3%) in Q3, though supply chain pressures had been a constraint on production. Activity restrictions and measures by the authorities to curb leverage had driven a slowdown in China in the quarter (0.2%). GDP in Japan contracted in Q3 (-0.8%) on tighter restrictions as virus cases surged around the time of the Tokyo Olympics, while auto production was held back by input shortages.    

In Australia, lockdowns returned in Q3 as Delta outbreaks led to an acceleration in caseloads from very low levels. Lockdowns were in place across New South Wales, Victoria and the Australian Capital Territory for much of the quarter. There were short lockdowns in some of the other states including Queensland and South Australia. In this lockdown cycle, restrictions on some sectors, including retail and construction, were more stringent than seen previously. Mobility indicators in the nation's two largest capital cities in Sydney and Melbourne fell to the levels seen in earlier lockdowns but remained elevated, on average, across the other capital cities.       

The 1.9% contraction in quarterly GDP was driven mainly by a sharp decline in household consumption (-2.5ppts) as the lockdowns restricted spending opportunities, particularly in services and discretionary categories. However, alongside the fall in spending, governments had ramped up payments to support households with many people on reduced hours or unable to go to work altogether. As a result, the household saving ratio has surged higher again and is just off the highs seen in 2020 at 19.8%. Pressures in global supply chains drove a substantial fall in business inventories and this weighed heavily on activity in Q3 (-1.3ppts). Amid the lockdowns, firms pushed back equipment spending, temporarily pausing the upswing in the business investment cycle (-0.1ppt). Capacity constraints and restrictions have stalled residential construction activity. Attenuating the weakness in private demand, public demand lifted (0.9ppt) as the vaccine rollout accelerated. Net exports swung from a large contraction in Q2 to add 1ppt to activity in Q3. Resources exports rebounded but import spending fell in line with weak domestic demand conditions and global product shortages.        

With vaccination rates surpassing key thresholds, lockdowns across the nation were eased early in Q4. The reopening phase is now well underway and the national vaccination rate is on track to rise well into the 90% range by the end of the year. High-frequency data sources indicate momentum in the economy is gathering pace; mobility is elevated, household spending is rebounding supported by accumulated savings and the labour market is recovering with employment levels on the rise. 

Overall, the Delta setback is a recovery delayed, not derailed, and GDP growth in Q4 should easily regain the lost output seen in Q3. The 1.9% fall in GDP was not as large as feared and is relatively modest considering hours worked across the economy were down 5.4%q/q. This points to the degree of adaptation that has occured since the outset of the pandemic, with spending online surging to record levels and businesses more accustomed to operating around restrictions.  

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GDP — Q3 | Expenditure: GDP (E) -2.0%q/q, 3.9%Y/Y

Household consumption (-4.8%q/q, 1.8%Y/Y) — The return of extended lockdowns led to a 4.8% contraction in household consumption, its second largest quarterly fall on record surpassed only by the 12.1% plunge seen during the 2020 national lockdown. This leaves household consumption down 5.2% on its pre-pandemic level.   

Household consumption fell by 8.4% across New South Wales, Victoria and the Australian Capital Territory where lockdowns were in place for much of the quarter. Across the other states and territories, household consumption was up by 0.7%q/q, just about matching the rise seen in the previous quarter.   

Consistent with earlier lockdowns, the categories of household consumption that showed the largest falls were in services (-5.8%q/q) and discretionary consumption (-11.3%q/q). For comparison, much deeper declines were seen in last year's national lockdown with services -17.4%q/q and discretionary consumption -23.7%q/q. In Q3, with domestic travel curtailed by state border closures and with restrictions in place in the hospitality sector and at entertainment venues, large falls were seen in transport services (-40.9%q/q), hotels, cafes and restaurants (-21.3%q/q) and in recreation & culture (-11.8%q/q). As a result, services consumption has fallen back to be 9.5% down on its pre-pandemic level while discretionary spending is 14.7% lower across the period. Goods consumption contracted by 3.3%q/q, a much smaller decline than services. In part, this reflects the boost goods consumption received when services were unavailable in lockdowns, which helped drive online sales to new record highs. Weighing on goods consumption in Q3 were new vehicles purchases, reflecting unavailability due to global shortages, while fuel (-13.1%) and clothing and footwear (-22.0%q/q) fell in response to activity restrictions. The decline in fuel weighed on essential consumption, down 0.9%q/q. Amid the lockdowns, demand for both food (5.2%q/q) and alcoholic beverages (7.4%) surged. Goods and essential consumption remain above pre-pandemic levels.    

While the lockdown disruptions caused hours worked to contract by 5.4% in Q3, gross household disposable income lifted by 4.6%q/q, posting its sharpest rise since Q4 2008. This was driven by governments ramping up support payments to households through the lockdowns, with social assistance benefits surging by 25.4%q/q. Adjusting for inflation, real growth in household disposable income accelerated by 4.3% in Q3 to be up 1.1% through the year. This configuration of outcomes with real income rising at a time of falling consumption saw the household saving ratio surge up from 11.8% to 19.8% and is just below the highs seen in 2020. This significant volume of accumulated savings will support the recovery in Q4 and help to sustain a strong pace of GDP growth through 2022. 

Dwelling investment (0.1%q/q, 11.4%Y/Y) — The upswing in the residential construction cycle has stalled on capacity constraints and the effects of restrictions placed on the sector during the Delta lockdowns. Dwelling investment slowed further in Q3 to 0.1% from 0.6% in Q2 as the earlier surge driven by stimulus measures from the HomeBuilder scheme, first home buyer incentives and low interest rates has plateaued, though it is up 11.4% through the year. 

New home building contracted for the first time in a year with a 1.6%q/q fall as activity in New South Wales plunged by 10.1%q/q amid the Sydney lockdown. However, this was offset by a reacceleration in alteration work (2.5%q/q) after a flat Q2. Residential construction is up 6.9% on pre-pandemic levels around an uneven mix. Alterations have surged by 22.2% with the support of the HomeBuilder scheme while the lockdowns have encouraged many Australians to make modifications to their home, but new home building is lower over the period (-1.9%). 

Despite restrictions on property inspections during the Sydney and Melbourne lockdowns, these markets remained robust and housing prices nationally increased by 5% over the quarter. This supported a 3.1% lift in ownership transfer costs — relating to fees associated with real estate transactions — to be 41.1% higher over the year.       

Business investment (-1.1%q/q, 9.0%Y/Y) — With extended lockdowns returning in the quarter, measures of business confidence and trading conditions deteriorated substantially, though they held up at far better levels than in 2020. These dynamics drove a 1.1% contraction in business investment in the quarter, temporarily pausing the upswing in the cycle. 

Equipment spending has been the impulse behind the upswing on the back of a rebounding economy, tax incentives and accommodative financing conditions. However, in Q3 it led the overall decline with a 3.1%q/q fall. The lockdowns clearly caused spending decisions to be delayed, while product shortages may have also been a contributing factor. Despite this, equipment spending was still 4.9% above pre-pandemic levels. After rising strongly in Q2, non-dwelling construction stalled in the quarter (-0.1%q/q), weighed by the Covid restrictions placed on the construction sector. Following the disruptions of Q3, the recent ABS Capital Expenditure Survey reported that firms have substantially lifted spending plans through the remainder of the financial year.  

Public demand (3.3%q/q, 7.2%Y/Y) — The rollout of Covid-19 vaccines by federal and state and territory governments drove to the fastest quarterly acceleration in public consumption spending since the mid-1990s with a 3.6% rise in Q3. Together with a 2% rise in underlying investment, public demand increased by 3.3% in the quarter to be up by a very strong 7.2% through the year.  

Inventories (-1.3ppt in Q3, -0.7ppt yr) — Global supply chain constraints and the disruptions associated with the domestic lockdowns weighed on inventories in Q3. Cuts to production amid input shortages led to reduced motor vehicle dealership inventories, reflected in a large decline in wholesale inventories. Manufacturing inventories fell as product shortages became more widespread and delivery times lengthened out. Inventories were declining alongside falling business sales throughout the lockdowns.  

Net exports (+1.0ppt in Q3,-0.3 ppt yr) — Net exports added 1ppt to activity in Q3, reversing the drag seen in the previous quarter. The resumption of resources exports (3.0%q/q) from earlier weather-related disruptions drove a 1.2% rise in exports, partially rebounding from a 3.4% contraction in Q2. Exports were still 11.8% down on pre-pandemic levels weighed heavily by weakness in the service sectors (-47.8%), including tourism and education, due to the international border closure. Imports declined by 4% in the quarter due mainly to a 9.5%q/q fall in consumption goods. Constraints on global production hit new vehicle imports very significantly (-17.5%q/q) while the domestic lockdowns restricted demand generally. While goods imports were substantially higher than at the end of 2019 (7.3%), services imports were almost 60% lower over the period reflecting the prohibition placed on overseas travel. Overall, this leaves imports down 8.9% on pre-pandemic levels.  

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GDP — Q3 | Incomes: GDP (I) -1.8%q/q, 3.8%Y/Y

Real GDP income contracted by 1.8%q/q, slowing annual growth from 9.3% to 3.8%.  The weakening in the economy associated with the Delta lockdowns drove a decline in national income, with nominal GDP contracting by 0.6% in the quarter. However, it remains substantially higher through the year (11.2%) and is 7.2% above its pre-pandemic level, supported by elevated commodity prices. 

In Q3, the terms of trade ticked up by modestly by 0.5%, resetting to a new record high level. This follows a 23.1% surge over the past year as the global economic recovery effort has led to very strong demand for Australia's major resource commodities, pushing up prices as a result. More recently, though, iron ore prices have retraced from their highs, however; prices have advanced for other commodities, including LNG and coal.

Given the lockdowns, a key dynamic in the quarter was income support from federal and state and territory governments. Total factor income (sum of income generated by employees, companies and unincorporated businesses) typically moves in line with changes in GDP. However, in Q3 total factor income lifted by 2.3% whereas nominal GDP contracted by 0.6%. The spread between these outcomes reflects the fiscal boost provided by governments to households and businesses.  

With the recovery in the labour market upended by the lockdowns, compensation of employees slowed to growth of 0.5% in the quarter following strong gains in the previous 4 quarters. This saw annual growth easing to 4.7% from 6.3%. 

Private non-financial corporations operating surplus lifted by 4.7%q/q driven by the mining sector on strength in LNG and coal prices, while the hospitality and construction industries were supported by government transfers. But small businesses were the main beneficiary of Covid-related subsidies, with gross mixed income surging by 8% in Q3. Financial corporations operating surplus increased by 1.3%q/q, taking growth through the year to a 4-year high at 4.7%. 

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GDP — Q3 | Production: GDP (P) -1.9%q/q, 3.8%Y/Y

The September quarter GDP production measure fell by 1.9%, with growth through the year stepping down from 9.6% to 3.8%. At a broad sector level, the steepest declines in output were seen in household services (-5.5%) and in goods distribution (-4%q/q) with lockdowns affecting these sectors the hardest. Both goods production (0.1%q/q) and business services were around flat in Q3. In the 2020 national lockdown, falls in output were much larger and more broad based, indicating the degree of adaptability Australian businesses have displayed around lockdown disruptions.   

In the services sector, production fell by 2.4% in the quarter to be 0.9% below its pre-pandemic level. Within this, household services contracted by 5.5% in the quarter, leaving it 3.6% lower than at the end of 2019. Heavy falls were seen in the hospitality (-26.4%) and recreation (-7.5%) industries in Q3 as public health restrictions halted interstate travel and led to venue closures. The health care industry also weighed (-2.1%q/q) as elective procedures were canceled during the lockdowns. Business services eased 0.2%q/q but are up 1% on pre-pandemic levels. Financial services (1.3%q/q) expanded on superannuation changes and elevated household savings. This helped to attenuate declines in rental, hiring and real estate services (-1.2%) on reduced demand for tourism-related vehicle rentals and in administration & support services (-2.1%q/q) as demand for labour hire and travel agency services fell. 

Goods sector production was down 1.3%q/q to be 1.7% below pre-pandemic levels. Lockdown restrictions drove a 4% fall in the good distribution sector, leaving it 3.3% lower than prior to Covid. In Q3, wholesale trade declined by 5.4% as fuel demand fell in the lockdowns and cuts to production resulted in lower sales for domestic vehicle dealerships. Meanwhile, retail trade fell 3.4% on pandemic restrictions and the transport industry contracted by 3.2% as domestic tourism was hampered by border closures. Goods production was flat in Q3 (0.1%) with a 1.7% rise in mining offsetting falls in manufacturing (-1.1%q/q) associated with input shortages and construction (-1.1%q/q) as work was disrupted by restrictions on sites.

      

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GDP — Q3 | Prices

Economy-wide inflation through the GDP deflator slowed to a 1.4% rise in Q3 coming off faster increases in the prior two quarters. Annual growth has accelerated to 7.2%, its highest in 11 years. However, this is coming from a very weak base with the low of -0.1% reached a year earlier, and it is also reflecting the surge in the terms of trade over the period. The gross national expenditure deflator, which adjusts for the terms of trade impact, is running at a much more modest 1.9%Y/Y. Meanwhile, the household consumption deflator (a proxy for the CPI) was little changed at 1.8%Y/Y from 1.7% previously.    

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GDP — Q3 | Productivity

The effects of the Delta lockdowns were seen in the 5.4% plunge in hours worked across the economy in Q3, contracting to 3.9% below its pre-Covid level. Hours worked in the market sector fell more sharply, down 6.8% on the quarter and are also 6.8% lower than at the end of 2019. With these falls substantially larger than the decline in output (-1.9%), GDP per hour worked advanced by 3.7%q/q and by 5.3%q/q in the market sector.  

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GDP — Q3 | States 

New South Wales state demand contracted by 6.5% in Q3 to be down by 3.4% on its pre-pandemic level. This compares with an 8.4%q/q fall in the 2020 national lockdown. Household consumption was crunched by 10.8%q/q as the lockdown hit hospitality and entertainment spending. The temporary suspension of construction work and associated restrictions led to a 5%q/q decline in dwelling investment. Business investment rolled over by -8.7%q/q in a severe loss of momentum to the earlier upswing. Disruptions to trade and restrictions saw both equipment spending (-13.4%q/q) and non-residential construction (-9.1%q/q) off heavily in the quarter. Public demand provided some offset with the pace lifting to lifting 3.2%q/q from 2.8%q/q in Q2.  

Relative to NSW, the decline in Victorian state demand was a fairly modest 1.4%q/q despite also seeing a lengthy lockdown that extended over into Q4. Overall, state demand is down just 0.3% on pre-Covid levels. A 5.2%q/q fall in household consumption was the key dynamic, with spending at entertainment and hospitality venues and in clothing and footwear retail seeing the largest declines. However, all other components advanced in Q3. Residential construction activity lifted by 2.3%q/q coming off a weak Q2 (-0.6%). There was a solid 3.7%q/q rise in business investment, which is now up 16.3% through the year and  2.5% higher than at the end of 2019. Public demand lifted by 3.4%q/q in support of the state's vaccine rollout.     

The other states saw only short periods of lockdowns or remained largely unaffected by Delta outbreaks in Q3. In Queensland, state demand softened slightly to 1.8%q/q from 2.0% in Q2 but was now 6.2% above pre-Covid levels. Household consumption growth was a modest 0.3%q/q (2.9%Y/Y). Residential construction activity is running at an incredibly robust pace (4.6%q/q, 27.6%Y/Y) in response to significant policy stimulus. Business investment (1.1%q/q) was supportive, while policy decisions in relation to Covid-19 response measures drove a 4%q/q rise in public demand. South Australian state demand lifted by 1.4%q/q, maintaining the rise seen in Q2 and advancing to 5.6% above pre-pandemic levels. Growth in household consumption was 0.3%q/q, supported by discretionary categories. Business investment surged (8.1%q/q) with engineering construction in a strong upswing (28.4%Y/Y). A 0.8%q/q lift in public demand was driven by spending associated with the vaccine rollout. 

State demand in Western Australia posted a 0.6%q/q rise to be running 6.3% higher than end 2019 levels. In the quarter, household consumption increased by 1.9% with the state hosting a couple of major sporting events. However, the overall expansion lost some momentum during Q3 due to a softening in residential construction (-1.5%q/q), business investment (-2.6%) and public demand (-0.7%q/q). A 4.2%q/q rise left Tasmania state demand up 9.5% on pre-pandemic levels. Retail and services spending drove an overall 0.9%q/q rise in household consumption. Residential construction (23%Y/Y) and business investment (40.9%Y/Y) have clearly benefitted from the Covid-19 stimulus response. Meanwhile, the vaccine rollout drove a 4.8%q/q rise in public demand.