Economic growth on an upward curve

Our annual superannuation statements will reflect the unexpected recovery

Australians all, let us rejoice for we are richer thanks to the rally in the domestic stockmarket that most of us are invested in through our super.

FactSet figures show that the

All Ordinaries index appreciated by 26.4% in the 2020-21 financial year, more than making up for the 10.4% loss recorded in 2019-20. Big-capitalisation stocks, as measured by the ASX 100 index, jumped by 24% over the past financial year (from an 11.1% drop in 2019-20) while the Small Ordinaries soared by 30.2%

(from the previous year’s 8.3% fall).

This comes as no surprise given the stronger-than-expected recovery in the domestic economy and continued monetary and fiscal largesse.

The Australian Bureau of Statistics’ national accounts show the economy expanded by 1.8% in the March 2021 quarter – the third consecutive quarter of growth since the pandemicinduced 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.

Labour market stats indicate that economic growth will continue to progress. Employment increased by 115,200 in May – way above consensus expectations for a 30,000 gain and more than offsetting the 30,600 lost in the previous month. It was 1% higher in May 2021 than at the start of the pandemic. The unemployment rate dropped to 5.1% in May – the seventh straight month of decline – from 5.5% in April and 5.3% in March 2020, when lockdowns started.

Record or near-record business conditions and confidence and above-average consumer confidence readings indicate that Australia’s good fortune will continue.

Then again, as we say in financial markets or in terms of asset allocation, “it’s all relative”. The domestic bourse’s performance leaves much to be desired compared with our peers. America’s S&P 500 index skyrocketed by 38.6% in the year to the end of June 2021 and Japan’s Nikkei 225 outperformed the ASX with its 29.2% return. Not to mention, emerging markets – as measured by the MSCI emerging markets index – which popped 33.4% over the same period.

The question now is, will Australia have another happy year?

For now, the spread of the Delta coronavirus variant – and the consequent re-imposition of lockdowns and restrictions and interstate border controls – presents a near-term risk. A survey by The Australian Financial Review revealed that economists expect the recent shutdown in Sydney, Darwin, Perth and Brisbane would subtract between $2.5 billion (0.5% of GDP) and $3 billion (0.6% of GDP) from the third quarter’s national output. The longer the lockdowns remain, the bigger the hit to Australia’s growth. Then again, the Reserve Bank remains unperturbed. At its July 6 board meeting, it kept the cash rate unchanged at 0.1% and retained the April 2024 bond as “the bond for the yield target,” while at the same time scaling back its $5 billion weekly bond purchase program to $4 billion until at least mid-November this year. The RBA would have rolled over its “bond target” from April 2024 to November 2024 (as some speculated) and/or kept its weekly bond purchases at $5 billion at the very least if it didn’t believe its own prognosis for the domestic economy to bounce back quickly after the outbreaks are contained and restrictions eased. There’s also the government’s increased efforts at lifting the rate of vaccination and hopefully prevent a recurrence of the rolling lockdowns we’ve seen over the past 15 months.

Here’s looking forward to a happy rest of 2021-22.

Benjamin Ong is director of economics and investments at Rainmaker Information.