GDP figures are creeping to Great Depression levels, but there’s more to the story

On September 2, gross domestic product (GDP) data for the June quarter confirmed that Australia is experiencing its first recession since 1991. Australia has recorded backwards growth for the second quarter in a row, with Australian GDP falling by 7% in the June quarter.

While the figure is better than forecasts a few months ago – about a 10% fall was the view from many in April – there’s no sugar coating the significant hit the Australian economy has taken this year. This is the worst quarterly decline since quarterly data started being recorded in 1959.

On an annual basis, GDP growth has declined to 6.3%, which at this stage looks to be the worst since 1930-31, which saw financial year GDP fall by 9.4%.

Some of the main reasons for the contraction are:

• A huge fall in production: This reflects the stage three economic shutdown, which began in late March. 
• Household spending dropping: This was the biggest drag on the June quarter data, falling by 12.1% over the period, which was more than we expected and more than was indicated by the US GDP data. 
• Residential construction slowing: Residential construction fell by 6.8% in the June quarter and detracted 0.4 percentage points from growth. 
• Underlying business investment falling: This fell by 3.5% and detracted 0.4 percentage points from GDP growth, noting it excludes the impacts of transfers between the private and public sector.
• Inventory draw down: This detracted 0.6 percentage points from quarterly GDP growth. The inventory draw-down has been significant and given the pick-up in retail sales, some rebuild is expected which should add to GDP growth in the coming quarters.

There were some positive contributors during the quarter, including:

• Underlying public demand: This rose by 2.1% and added 0.5 percentage points to GDP growth, noting it excludes the impacts of transfers between the private and public sector. State and local government spending on health was up, along with defence spending for personnel related to the pandemic. 
• Net exports: These contributed 1 percentage points to June quarter growth as the fall in imports (-12.9%) was larger than the decline in exports (-6.7%) which mainly reflects the fact that Australians spend more overseas than tourists bring into Australia and this is included as a boost to net exports.

State-by-state, the biggest falls in state final demand were in NSW (-8.6%) and Victoria (-8.5%) which is unsurprising given that these are the states that had the highest count of COVID-19 cases and the strictest lockdowns, followed by Tasmania (-7.4%), WA (-6.0%), Qld (-5.9%), SA (-5.8%), NT (-4.9%) and only a small 2.2% fall in ACT.

Key differences between now and The Great Depression

It is still uncertain whether this corona-driven slump ended in the June quarter given that the lockdown in Victoria (worth 25% of GDP) will be a big drag on activity. Our current forecasts assume another small -0.3% decline in GDP in the September quarter which means that the recession will drag on until the last quarter of 2020.

Some might look at these figures and say we are in a depression. However, the current slump is different to past recessions and the Great Depression in two key ways.

1. It has been caused by a government-mandated shutdown of much of the economy, as opposed to a cyclical boom leading to a bust which takes a long time to work through as excesses have to be unwound. This downturn was not preceded by a boom unlike the recessions of the 1970s, 80s and 90s and there was nothing like the Roaring Twenties. 
2. Monetary and fiscal stimulus has been unprecedented and very rapid whereas it normally only occurs more slowly and is smaller. For these reasons the economy should be able to bounce back faster – but of course much depends on getting coronavirus under control.

Australia’s story so far

It’s also worth noting Australia has fared relatively well in the June quarter downturn compared to other countries around the world (see chart below) which all had various levels of lockdowns or restrictions.

Australia’s relatively less worse performance reflects its initially better control of the virus, large and well targeted and timed stimulus programs and support for our exports from the earlier rebound of the Chinese economy.

However, given the stricter lockdown in Melbourne since early August and the other restrictions across the rest of Victoria, the outlook for GDP growth in the September quarter is for another negative quarter of growth (albeit a much smaller decline than the June quarter). By comparison, growth in a lot of other global counterparts (like the US) looks to be in a cyclical upswing as low interest rates and government fiscal stimulus boost economic growth.

What’s next?

After this low point in Australian GDP (which we think will be the September quarter), there will be a need to fill the growth pothole left by the COVID-19 pandemic, so the pressure will remain on the Reserve Bank and Federal and state governments to provide additional support to the economy.
Federally this is likely to come in the form of a bring forward of tax cuts and tax incentives to boost consumption and investment possibly in next month’s budget.

And we now see the RBA in the months ahead potentially cutting the cash rate to 0.1%, increasing and broadening its bond buying program and adopting an even more dovish commitment to not raise rates until inflation is actually and sustainably back in the 2 to 3% target band.