Australia's economy is recovering but remains very much in need of government stimulus
The Australian economy in the last three months of 2020 grew quite strongly, but overall 2020 was the worst calendar year of the past 60 years. The 3.1% December quarter growth was almost as strong as occurred in September, but a closer look highlights that just because of a strong recent performance we should not discount the bad times.
Amid any talk of the economy at the current moment, we must of course mention the pandemic.
A major reason for Australia’s relatively good economic performance compared to other nations is that we have been much less affected by the pandemic as those in Europe and the United States.
There is a pretty solid correlation between economic performance in 2020 and the number of deaths from Covid:
Graph not displaying? Click here Certainly you would much rather be in Australia’s position than most other nations within the OECD. And Swedish residents must be wondering if their government’s approach to the virus was all that sensible given their initially more open strategy has resulted in negligible difference in economic growth but many more deaths.
The December quarter in Australia saw the second strongest quarterly growth record over the past 45 years (the best happened in September last year).
But even with a 3.1% growth in December, the last quarter of 2020 saw 1.1% less production than did the final quarter of 2019:
Graph not displaying? Click here That annual fall is much better than the 6.3% annual fall we saw in June last year, but focusing on the quarter to quarter growth does exclude the losses in production that have occurred.
If we calculate the annual amount of production (which is how we generally refer to total GDP), 2020 saw a 2.5% fall in production compared to 2019 – the biggest calendar year fall recorded going back to 1959:
Graph not displaying? Click here Even more stunning was that GDP per capita in 2020 of $19,810 was 3.5% below what it was in 2019. By comparison the next worst calendar year fall was 2.5% in 1991 during the recession.
2020 was not just the worst year since 1960, it destroyed all records since then.
Quarterly growth can suggest the ship has been righted with no passengers lost.
Consider that if we just look at quarterly GDP (ie the amount produced in Australia in a three month period), the December quarter of GDP was just 3.5% below where you would have expected it to be given the trend of the previous decade.
And even better, it looks like we’ll be back to trend levels later this year: Graph not displaying? Click here That is exceptionally good, but it does rather allow us to forget the bad quarters – as though the lost production of three months is wiped away by the following three.
In reality it is much harder to get back that lost work. When we instead look at annual GDP (ie the amount produced over 12 months), we find ourselves 4.5% below where we were expected to be given the past decade, and a long way from looking like we will be back on track:
Graph not displaying? Click here That’s not to say the quarterly recovery from the depths of last year are not good, just that we should not pretend the impact of the bad times is gone. And those suggesting inflation is about to come back due to this strong quarterly growth are clutching at some rather fantastical straws.
So what produced the strong growth in the December quarter? We did.
Our going out and shopping, buying clothes (up 16%), cars (up 32%) and being able to go to restaurants and cafes all led to a 4.3% jump in household spending in the December quarter.
But even with that our spending at the end of last year was 2.7% below what it was at the end of 2019, and overall households spent 5.8% less in real terms throughout 2020 than we did in 2019:
Graph not displaying? Click here
It’s worth noting that production in 2020 across seven industries fell more than 5% - with the accommodation and food services industry the hardest hit with yearly production in 2020 down 20% on what occurred in 2019:
Graph not displaying? Click here Other than consumption, the big drivers of growth came from exports (though this was cancelled out by the increase in imports) and also the increase in the purchases of machinery and equipment and dwelling construction off the back of the government’s stimulus measures.
Graph not displaying? Click here And as ever government payments through jobseeker and jobkeeper are also still driving growth, but with public investment having little impact:
Graph not displaying? Click here The drops in jobkeeper and jobseeker payments however did see a fall in real household disposable income. But despite this drop, households are better off overall than they were in the past decade when real incomes were flat – mostly due to the continual boost in social assistance and tax cuts.
Graph not displaying? Click here
But just how badly is the economy really going?
A nice and easy measure is to combine real GDP growth and inflation. The target for annual GDP growth is around 2.75% to 3.25%, while the Reserve Bank targets 2% to 3% inflation.
This means the economy when all is going well the combination of the two should see the “nominal” economy growing at between 4.75% and 6.25%: Graph not displaying? Click here In December it was 0.3% below where it was a year ago – a worse result than occurred during the 1990s recession.
Yes, the December quarter figures are good, but nothing here suggests we are close to needing the Reserve Bank to start lifting interest rates or for the government to act as though things are back to normal.
The Australian economy remains very much in need of government stimulus.