December quarter GDP numbers show a strong rebound, but further recovery will be slower

Australia’s December quarter National Accounts add the final piece of the puzzle to what was a truly extraordinary 2020. GDP rose by 3.1% through the quarter, beating expectations of a 2.5% lift, and in tandem with September’s 3.4% lift, marked the first time in the 60-year life of the National Accounts that GDP has grown by more than 3% in consecutive quarters.

It has been an exceptionally strong rebound from the 7% drop in the June quarter of 2020, at the height of the COVID recession, and annual GDP growth now sits just 1.1% below its pre-COVID, December 2019 level.

Household spending continues to drive growth
The breakdown of GDP by components demonstrates clearly, yet again, that this is a consumer-led recovery. Household spending rose by 4.3% over the quarter, contributing 2.3 percentage points to GDP. This was most pronounced in Victoria, where household consumption jumped 10.4% in response to the end of the Melbourne lockdown, compared to an average of 2.3% across the other states. Spending on services was another important aspect of the rise in consumption, up 5.2% as mobility continued to increase. Spending on goods, in contrast, was up by 2.8%.

Australians continue to save at higher rates than before the pandemic, although December’s household savings rate of 12% is down on its COVID peak of 22%. Added savings should support consumption if incomes decline following the withdrawal of fiscal stimulus programs such as Jobkeeper, although disposable incomes in the December quarter were still up by nearly 5% on the previous year.

Other factors that made significant contributions to GDP growth were residential construction (0.2 percentage points), underlying business investment (0.3 percentage points) and underlying public demand (0.3 percentage points). Net exports detracted 0.1 percentage points, due to strong growth in imports, and inventories detracted 0.1 percentage points from GDP after a large contribution in the September quarter.

Pandemic success pays off…

Australia’s global standing in controlling the pandemic is translating to economic performance as well, and we are far ahead of many of our peers on the road back to pre-COVID levels of GDP. Other countries in similar situations, such as Korea, Japan and Israel, have also had high levels of success in controlling the pandemic, and a resounding lesson from the year is that economic growth in this environment is largely contingent on containing the virus. And when you compare the economic freedoms that Australians are enjoying at the moment while many parts of the world endure strict lockdowns, it is easy to appreciate why this is the case.

… but a long road back from here

Despite robust September and December quarter GDP numbers, further recovery for the Australian economy from this point is likely to be slower for a number of reasons.

Government support programs which deferred some of the economic pain we would have otherwise incurred in 2020 are being phased out, although accumulated household savings will offer a degree of support to incomes to offset this.

Critical industries which are yet to fully re-open, such as tourism and education, don’t appear to be close to doing so. According to the National Accounts spending on transport services and hotels cafes & restaurants is still down quite significantly (-78.1% and -29.8% per annum respectively) and further substantial improvement is unlikely while borders remain closed.

Finally, it is worth remembering that prior to COVID, growth in the Australian economy was driven largely by population growth, and low immigration is likely to remain a significant drag on GDP for some time to come.

With internal mobility largely restored and the low-hanging fruit for the recovery taken, we expect the economy to continue to grow at a steady but lower rate than over the past two quarters. GDP should approach pre-COVID levels in the June quarter (or possibly the March quarter), which is a stronger than expected performance but still almost 3% lower its pre-COVID trend path. Restoring growth to trend will be much harder for all of the aforementioned reasons.

Although the National Accounts are in a stronger than anticipated position, the nation’s fiscal and monetary policy response should be unaffected. The Federal Government was already transitioning away from direct support to lower levels and other forms of stimulus. For its part, the RBA will take into consideration the spare capacity that remains in the economy (unemployment remains at least 1% above pre-COVID levels) and is likely to maintain lower interest rates through 2021 and 2022, despite recent spikes in bond yields.