Australia’s economy looks better than a year ago. But sadly we aren’t out of the Covid woods yet
As expected, the June quarter GDP figures revealed record annual growth as the economy looks much better than it did this time a year ago. The problem, however, is that while the quarterly growth figures were fine, they will likely be the best we will see until next year as we remain buffeted by the Covid economic storm.
Everyone in Australia can pat themselves on the back, because in the June quarter the Australian economy was 9.6% larger than it was in the same quarter of 2020 – a figure that beat the previous record of 9% growth in March 1967:
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If that sounds absurd, well yes, it is. When you consider that during the mining boom years the highest annual GDP growth ever reached was 4.9%, you don’t need to have a degree in economics to know something is amiss – because we sure as heck are not in a boom right now.
As I noted on Tuesday, the only reason the figure is so large is because last June almost everyone was in lockdown, so anything would look good by comparison.
So really the focus should be on the quarterly growth. At 0.7% it is above expectations, but to be honest those expectations were rather more guesswork than usual.
Investment bank UBS on Monday actually lowered its expectations for growth from 0.7% to 0.4% but noted it “could be anything really”.
And look, who can blame them for being a bit unsure. Consider that in June household consumption grew by 1.1%. That is the smallest change since the pandemic began and it is still a bigger change than had occurred in a decade before the pandemic:
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So why did the economy grow by 0.7% in June? That jump in household consumption mainly, followed by government spending and investment:
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Nearly all the growth came from spending by households – which made up for the drop in exports and the increase in imports (due largely to households buying things).
And what did we spend our money on?
Mostly utilities, rents and on transport – both services and new cars:
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We also spent a lot more eating out at cafes and restaurants and staying at hotels, but we spent less on household furnishings than we did in the first three months of this year.
This, however, is an example of how quarterly figures can also disguise the real picture.
Yes, spending on hospitality and transport services grew, but it remains well down on pre-pandemic levels, while our spending on household furnishings and new cars remains well above:
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And, of course, our spending on items such as transport and hospitality services is currently dropping back to the levels of last year due to the current lockdowns.
Another concern is that while private investment either in dwelling or non-dwelling construction or the purchase of machinery and equipment has grown strongly over the past year, there too we see a slowing as the government’s incentives come to an end.
Those incentives helped the economy through last year’s lockdowns. But in June, as they wound down, it meant private sector investment contributed less to the economy in June than did that fall in exports that occurred due to weather and trade disruptions:
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How are such things fair when New South Wales and Victoria are in lockdown?
That, of course, is the main problem with these figures – yes, they look good compared to June last year, but they also look good compared to things right now.
The September quarter figures, which will be reported in three months’ time, will likely show another fall. Stephen Smith from Deloitte Access Economics suggests the fall could be as much as 4%.
That, I don’t need to tell you, is not a good thing.
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But the worry is that it comes off the back of just 0.7% growth this quarter – that’s pretty solid growth in normal times, but not really during a recovery.
In March, Australia’s GDP was above the level it had been prior to the pandemic, but was still 2% below where we would have expected it to be had the long-term trend continued. That was a very strong recovery from where we were last year, but the 0.7% growth in June meant we were still 1.9% behind the trend.
A 4% fall in the current quarter would be a massive setback:
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So what do we take from these figures? Unfortunately, not much. They mostly look good in comparison to the worst of times last year and bear little resemblance to the economy we are currently in just three months later.
The economy, off the back of large government consumption and investment and household spending, had recovered much better than hoped a year ago. But a year ago we also were hoping that once we had a vaccine available, lockdowns would be a thing of the past.
Until that is the case, GDP figures will be largely irrelevant.