Australia’s economy contracted by the most on record last quarter, underscoring the need for unprecedented stimulus measures as the recovery from the nation’s first recession in almost 30 years is buffeted by Victoria state’s renewed Covid outbreak and lockdown,
Gross domestic product plunged 7% from the first three months of the year, the largest fall since records dating back to 1959, the statistics bureau said in Sydney Wednesday. The slump was larger than economist forecasts of a 6% drop. From a year earlier, GDP tumbled 6.3% versus an estimated 5.1% fall.
The Australian dollar fell after the report, and was trading at 73.52 U.S. cents at 1:02 p.m. in Sydney.
Australia’s early lifting of restrictions and reopening of its economy is now being offset by an almost two-month lockdown in Melbourne, the nation’s second-largest city with about 5 million people. That’s delaying the economy’s recovery.
“While the drop in GDP last quarter wasn’t much larger than the RBA had anticipated, it will keep the pressure on the bank to announce more stimulus,” said Marcel Thieliant, senior economist for Australia at Capital Economics.
The Reserve Bank of Australia on Tuesday expanded a lending facility for banks to A$200 billion ($147 billion) to help keep interest rates low for borrowers and keep credit flowing. Governor Philip Lowe also said that the board “continues to consider how further monetary measures could support the recovery.”
The central bank and government are working in tandem to try to support the economy. The former has kept its cash rate near zero and set a target of 0.25% on the three-year government bond yield, and the latter is extending its labor market assistance package.
Today’s GDP report showed:
- Household spending — which accounts for about 56% of the economy — slumped 12.1%, subtracting 6.7 percentage points from GDP; government spending rose 2.9%, adding 0.6 percentage point
- Investment in new and used dwellings fell 7.3% in the quarter
- Net exports contributed 1 percentage point to GDP
- The savings rate soared to 19.8%, the highest rate since 1974
The RBA predicts Victoria’s renewed lockdown will lift national unemployment to about 10% later this year. The government, meantime, has injected tens of billions of dollars into the economy including its signature JobKeeper wage subsidy program designed to keep workers attached to firms as it tries to maintain employment connections until activity can resume.
The economy’s deep contraction was heavily driven by services. The data showed:
- Transport services, which includes airlines, plunged 85.9%
- Hotels, cafes and restaurants tumbled 56.1%
- Reflecting the government’s response to support the economy, social assistance benefits soared by 41.6%
What Bloomberg’s Economists Are Saying
“The virus shock is a services shock. Around two-thirds of the slump in GDP can be accounted for by just four segments of household spending – vehicle use, travel, recreation and culture, accommodation and hospitality spending. The sharp declines in these segments during 2Q sets up the possibility that Australia’s economy avoids a further contraction in GDP in 3Q despite the Victorian lockdown.”
James McIntyre, economist
Australia’s record run of avoiding two consecutive quarters of negative GDP, which included avoiding recessions during the 1997 Asian Financial Crisis, the Dot Com Bubble and the 2008 global financial crisis, has come to an end. It now joins much of the world in succumbing to a pandemic-induced downturn.
On the upside, China’s stimulus to revive its economy is fueling demand for Australian commodity prices, keeping the terms of trade elevated in the second quarter. Australia saw a record current-account surplus of A$17.7 billion in the three months through June, aided by the nation’s closed international borders which is keeping people from traveling abroad.
Yet its trade position has also fueled the nation’s currency, which soared almost 30% from a nadir in March.
The central bank’s expanded Term Funding Facility, in addition to supporting the economy, should also help ease some of the upward pressure on the currency by confirming the RBA’s commitment to keeping conditions accommodative until activity recovers.