Christmas miracle: Out of recession
National accounts

Recession ends: The Australian economy (as measured by GDP) grew by 3.3 per cent in the September quarter after contracting 7 per cent in the June quarter and slipping 0.3 per cent in the March quarter. But the economy is still down 3.8 per cent over the year.

Contribution to growth: The biggest contributions to growth came from household spending (+4.0 percentage points); inventories (+0.8pp); ownership transfer costs (+0.3pp); and government consumption (+0.3pp). But detracting from growth was net exports (-1.9 percentage points); commercial construction (-0.3pp) and business equipment (-0.1pp).

Income: Real net national disposable income rose by 4.8 per cent in the September quarter but was down 3.5 per cent on the year. In nominal terms GDP rose by 3.7 per cent in the quarter but fell by 3.9 per cent over the year.

Productivity: GDP per hours worked fell by 1.1 per cent in the September quarter but was up by 3.2 per cent on the year.

Industry sectors: Seventeen of the 19 industry sectors grew in the September quarter. The biggest contribution to the overall increase in output came from Health Care and Social Assistance (+0.9pp) from Accommodation and food services (+0.6pp). Output fell 1.7 per cent in Mining in the quarter with Agriculture, Forestry and Fishing down 0.6 per cent.

What does it all mean?

• The supposed ‘textbook’ definition of recession is two consecutive quarters of economic contraction. It is hardly a perfect definition, failing to take into account that no two recessions are the same and failing to take into account the societal impact of recession – especially on the labour market. But based on this definition, Australia has emerged from recession and the outlook for growth is encouraging. Indeed the Reserve Bank has noted “the economic recovery is under way and recent data have generally been better than expected.” Governor Philip Lowe added in testimony to Parliament today that “we have now turned a corner and a recovery is underway”, while adding that the September quarter GDP reading was “good.”

• Certainly this has not been a ‘typical’ recession, and that it understandable given that it was caused by a health emergency rather than an economic emergency. But the response to the crisis has been tremendous. Governments, the central bank, trading banks and private companies are providing unprecedented support and stimulus to keep business in business and keep people in jobs. And while there is still some way to go, the economy is on its way back. And in the dark days of March, that was generally not expected.

• Reflect on the facts: consumer confidence is at 7-year highs; the jobless rate – while still high – stands at a better-than-expected 7 per cent; house approvals are at 20-year highs; retail spending is up 7.3 per cent on a year ago; and home prices are at record highs in over a third of regions and half of the capital cities.

• The job is not done. The economy is still around 4 per cent smaller than a year ago. But more people are returning to their workplaces as businesses re-open and gear up ahead of Christmas. And there is the real prospect of vaccines being rolled out in coming months.

• Now is not the time to drop the ball – the Reserve Bank highlighted this yesterday (and today) saying, “the recovery is still expected to be uneven and drawn out and it remains dependent on significant policy support.” The Reserve Bank reiterated its commitment to leave the cash rate at current levels (or lower?) for three years. The hard part in 2021 will be in mapping out a strategy that involves the winding back stimulus without threatening the recovery.

• We expect the economy to rebound 4.2 per cent in 2021 after contracting 3.3 per cent in 2020. Social distancing needs to be maintained, the virus must be suppressed and people need to have confidence to return to work, shops and entertainment venues. Vaccine developments are also critical to the outlook

• We retain our hope that the jobless rate has already peaked at 7.5 per cent. But the jobless rate will likely remain elevated, holding broadly around 6-7 per cent over most of the coming year, easing to around 5.75 per cent in a year’s time.

Published by Craig James, Chief Economist, CommSec