Australia’s second economic contraction caused by COVID has been less severe than feared, as increased public spending and a swelling trade surplus cushioned a steep drop in household spending during the East Coast lockdowns.
The third quarter GDP figures, released on Wednesday, December 1, 2021 by the Australian Bureau of Statistics (ABS), showed that Gross Domestic Product fell 1.9 percent compared with the previous three months. That result surprised economists who had mostly tipped a 2.5-3 percent contraction. At an annual rate, the economy expanded at a 3.9 percent in Q3 2021.
The recent quarterly contraction made it the third steepest on records. The worst fall was the 7 percent dive in Q2 2020 as the first COVID wave was strong, while Q2 1974 recorded a 2 percent contraction.
“Given the backdrop of lockdowns in NSW [New South Wales], Victoria and the ACT [Australian Capital Territory], this is an impressively strong performance”, said Sarah Hunter, chief Australia economist for BIS Oxford Economics.
The relatively resilient result for Q3 2021 provided a better platform for an economic recovery that is firmly under way. But the emergence of the new Omicron COVID variant means the health risks remain.
Growth in Government and consumer spending
Household consumption grew 0.7 percent in parts of the nation that dodged the extended lockdowns in Q3 2021. That expansion helped make up for the 8.4 percent drop of such spending in NSW, Victoria and the ACT, according to the ABS.
“This outcome highlights that once restrictions are eased and the virus is under control (either through low case numbers or high vaccination rates), the economy can recover rapidly. This finding is increasingly being confirmed by the labour market and retail spending data, and it’s likely that there will be a sharp turnaround in GDP in the December quarter”.
Hunter
Extra public spending helped keep the economy moving in the quarter, adding 0.7 percentage points to the growth rate. A swelling current account trade surplus, reaching a record $23.9bn in the quarter also added another 1 percentage point.
Drawing of household savings to aid recovery
Westpac Economist, Andrew Hanlan said a near doubling in the household savings rate to 19.8 percent as locked-down consumers curbed their shopping, and government payments rolled out, points to a swift recovery in spending that will bolster the economy.
Hanlan expects this sizeable household savings buffer to be drawn upon to help fund future spending – thereby supporting a strong rebound. The Economist however, warned that “this is subject to developments on the health front regarding the virus”.
A quicker than predicted recovery could add to concerns that inflation will rise faster than currently forecast, prompting the Reserve Bank to move sooner to raise its record-low interest rates that now stand at just 0.1 percent.
Gareth Aird, the Commonwealth Bank’s chief Australian economics, said markets are still trying to assess what the outlook means for prices and wages in the economy.
“Our expectation is that a very strong economic expansion next year will be accompanied by an acceleration in inflation and wages growth. On our figuring, the unemployment rate will drop quite quickly from here and we expect the Australian economy to be at full employment by late 2022” .
Gareth Aird
