Out of recession, but recovery will take time

As expected, the Australian economy bounced out of recession in the September quarter, with strong GDP growth of 3.3%. What wasn’t anticipated was the magnitude of the rebound, with consensus prior to the announcement of 2.5% growth itself a significant improvement on the outlook earlier in the year for flat or low-growth outcome in the September quarter.

Despite these healthier numbers, output is still down 3.8% on a year-on-year basis, a handy reminder that the technical definition of a recession doesn’t encompass the full span of negative impacts from a downturn and that the flow through of poor performance in the March (-0.3%) and June (-7%) quarters are still being felt across the economy.

That said, such a strong bounce back is encouraging in terms of our overall trajectory out of the crisis. It is also worth noting that if Victorian growth through the quarter had been in line with other major states, national GDP growth would have been 2 percentage points higher, at around 5.3%. As it was, Victorian output fell 1.2%, having shrunk by 16% over the past year. The result stands in contrast to states like Queensland, which despite border closures has actually recorded net economic growth over the past twelve months.

It's a clear demonstration of the impact of virus outbreaks and subsequent restrictions on economic growth, and should be remembered when making comparisons between this set of GDP numbers and those being generated in other parts of the world. A number of countries have bounced back more strongly in this quarter than Australia, but this is largely due to them having been more seriously affected in previous quarters, and some (for example, in the Eurozone) are likely to have negative growth in the December quarter thanks to resurgence of the virus on the back of the re-openings that allowed these most recent gains. In contrast, Australia should record another quarter of strong growth to finish the year.

The exception to this dynamic is the US economy, which for the moment seems to be holding up despite increasingly high numbers of new cases, hospitalisations and deaths in the wake of Thanksgiving.

What drove the stronger-than-expected results?

Household spending was the standout performer in the September quarter, rising 7.9% and contributing 4.0 percentage points to the headline GDP number. Spending on both goods and services rose through the quarter, although services increased more strongly, having further to recover after sharp falls in the June quarter. Public spending, inventories and real estate turnover also made contributions, whilst the effect of a flat residential construction market was negligible. Robust building approval numbers indicate that this is likely to improve in coming quarters as a wave of construction driven by government incentives like Homebuilder comes through the pipeline.

While consumers are more than happy to open their wallets again, businesses haven’t followed suit, with underlying business investment down 4.1% for the quarter (contributing -0.5% to overall GDP), matched by falls in non-residential building and new engineering construction. Net exports were also a significant drag (contributing -1.9% to overall GDP) on economic growth and are likely to remain as such as the global economy continues its recovery.

Some way to go for a full recovery

The Australian economic recovery is on track and GDP should return to its pre-COVID levels around the middle of 2021.Unemployment and underemployment are likely to persist in this environment, keeping wage growth and inflationary pressures low. The RBA has already indicated that it is likely to maintain lax monetary conditions through the period, and as other central banks pursue further easing we might see the RBA increase its quantitative bond purchase program next year to reduce subsequent pressure on the Australian dollar.

A key question will be whether household consumption, which is currently the engine room behind the recovery, can continue to hold up over a longer period with higher than average unemployment, particularly as government support programs are progressively withdrawn. The good news on this front is that household savings have been significantly higher through the pandemic than before (22.1% in the June quarter and 18.9% in the September quarter, against an average of 5% in 2019). This suggests that many households have built a healthy buffer against potential future falls in income, which should in theory provide some support to spending through 2021.