Powerful economic recovery continues
National accounts

What happened? The Australian economy (as measured by gross domestic product or GDP) grew by 1.8 per cent in the March quarter after rising 3.2 per cent in the December quarter and lifting 3.5 per cent in the September quarter. The economy now exceeds the pre-pandemic highs, up 1.1 per cent on the year. It has been the fastest recovery from recession in 45 years.

Implications: The economy is responding as hoped to unprecedented fiscal and monetary stimulus. The stimulus continues and further solid economic growth can be expected. Company revenues will continue to lift and so should profits, provided that firms have tight control of costs. Higher earnings are expected to translate to higher share prices. CommSec has lifted its end-2021 target for the ASX200 to 7350 points.

What does it all mean?

• If you ran a budget deficit of 10 per cent of GDP and cut interest rates close to zero and the economy didn’t respond then you would clearly be disappointed. But the stimulus has worked. Australia has been broadly successful in suppressing the virus (despite some limited outbreaks). Businesses and workers have been protected and supported over the past year through lockdowns and re-openings. And that has enabled the economy to get back to a sense of normalcy.

• As shown by the lockdown in Victoria, there is still some way to go to claim victory. But we are on the right path. Stimulus must remain in place until it is clear that a sustainable recovery has been achieved. Measures to suppress the virus need to be reinforced. And vaccination rates need to accelerate.

• The primary threats to the economic recovery are a broad Australian ‘second wave’ of the virus and a slow, extended vaccine roll-out.

• Today’s economic growth figures are largely ancient history. The good news is that more recent data readings remain solid, especially home purchase and building, mining and activity in manufacturing and services sectors.

• Growing pains should be expected as economies rebound. Indeed these are being reported across the globe through business surveys such as surveys of purchasing managers. Shortages of supplies and labour, rising input costs and port congestion are all being noted. But these will be addressed as more people return to work.

• After contracting 2.5 per cent in 2020, the economy could grow by near 5 per cent in 2021. The unemployment rate is expected to end 2020 near 5 per cent. Interest rates are not expected to lift for a few years. The Reserve Bank wants to see a jobless rate near 4 per cent; wage growth near 3 per cent and an inflation rate sustainably between 2-3 per cent before even thinking about lifting rates.

• Consumer spending will be supported by higher employment, increased job security, low rates and rising wealth levels. Record house building will occur over the next year. Business revenues will be supported by consumer spending, global economic recovery, low rates and government stimulus.

Published by Craig James, Chief Economist, CommSec