Outlook: Benjamin Ong

Start spreading the news … confidence and spending are soaring

In the words of Frank Sinatra, Australia is now “number one, top of the list, king of the hill …” Ol’ Blue Eyes was, of course, singing about the Big Apple, New York, but comparing economic apples with apples, Australia’s “top of the heap”.

The Australian Bureau of Statistics’ national accounts show the Australian economy expanded by 1.8% in the March 2021 quarter – the third consecutive quarter of growth since the pandemic-induced recession in the March and June quarters of 2020 – taking the annual growth in GDP up to 1.1% and national output above the level it was before the coronavirus struck.

Using the same measure, this beats America’s 0.4% GDP expansion over the same one-year period and is far and away above the economic contractions in the eurozone (-1.8%), Japan (-1.8%) and the UK (-6.1%).

There will always be dissenters, but for me the Morrison government has spent its money wisely. Its tax incentives have driven business confidence and conditions to record highs. National Australia Bank’s business survey showed business conditions jumped to an all-time high reading of 32 in April, bettering what was then the record high score of 24 in the previous month. Business confidence surged to a record high reading of 26 in April from the already above-long-term average readings of 17 in March and 19 in February (the long-term average is six).

Note that the survey was taken after reports of delays in Australia’s vaccine rollouts and the end of the JobKeeper scheme at the end of March and before the spending splurge announced in the 2021-22 federal Budget.

This surge in business confidence translated into increased private investment, with the national accounts tracking a 5.3% increase in the March 2021 quarter, which is 3.6% higher than a year before – the first year-on-year increase since the June quarter of 2018 and the fastest since the September quarter of 2017.

Businesses, big and small, have every reason to be confident because consumers are confident and spending. The WestpacMelbourne Institute index of consumer confidence remained elevated at a reading of 113.1 in May – the second highest print for the index since April 2010.

That augurs well for the continued acceleration in household spending, not to mention the improvement in the country’s labour market. Household consumption grew by 1.2% in the March 2021 quarter, contributing 0.7% to growth and driven by a 2.4% increase in spending on services as mobility increased on the back of eased social and trading restrictions. Spending on services would have grown by more had it not been for the continued closure of international borders. While spending on goods declined by 0.5% over the quarter, it remains above pre-pandemic levels.

With the household savings ratio remaining elevated at 11.6% in the March 2021 quarter, there’ll be more spending in future to satisfy pent-up demand. The savings ratio was recorded at 5.4% in the December 2020 quarter and has dropped by as much as 1.7% in the December 2002 quarter. That’s a lot of savings that will go towards the purchase of goods and services when (not if) Australians decide to run down their savings.

The renewed outbreak of coronavirus infections in Victoria – and the consequent lockdown in the state, and the threat of the infection seeping into other states – underscores the risk to Australia’s rosy outlook. Then again, this has encouraged us (well, most of us) to get vaccinated.

In the words of the RBA, “an important ongoing source of uncertainty is the possibility of significant outbreaks of the virus, although this should diminish as more of the population is vaccinated”.