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Growth, but not in the September quarter, and unsure when again

 

Australia’s economic growth is sitting on top of the roller coaster, having ridden to the high point in the June quarter, it is about to experience the unnerving thrill of a massive slump, when the September quarter data arrives. These are the highs and lows of the pandemic era!

In the June quarter of 2021, Australian economic growth continued to confirm the underlying resilience of the national economy, lifting 0.7% on the prior quarter. That was the fourth successive quarter of growth, after the shock of the -7.0% decline in the June quarter of 2020.

As can be seen below, the result more than a year ago is still to be observed in the annual data, which shows year-on-year economic growth at 9.6%. Compared to a year ago, sure, but overall, not so much.

image001 

For all that it is welcome, the June quarter’s stable growth doesn’t amount to much when the economy has ridden the coaster to the top and knows that the September quarter will see a deep and steep downturn. Thanks very much pandemic and lockdowns!

What is more, the certain knowledge of a sharp reduction in growth in the September quarter has the real prospect of being followed by a December quarter dip resulting from the lingering lockdowns, the progressive withdrawal of economic support packages and a worrying series of conditions in China that have – among other things – suppressed demand and prices for iron ore. Not to mention Australian coal is unwelcome in a China that seems focussed on pursuing an energy hunger-strike.

The risk, as a result, is that Australia hits a double-dip recession that bites deeply and is not backed up by the fiscal stimulus that has characterised much of the economic growth of the last year.

Greg Jericho sums this up well with an excellent graph in The Guardian showing where a 4% decline in the September quarter would leave the nation. Well below the long-term trend, and it would take a big turn around to return to trend, let alone get ahead! If that is compounded by the agonies of a double-dip recession because of a negative December quarter, it will be far harder to climb out again.

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As Jericho points out, there is not much ‘normal’ around right now, so about the most normal data available is the June quarter. That makes it worth while digging into the drivers of the quarter’s 0.7% growth.

 

 

The first pointer to note is that household consumption jumped ahead by a solid 1.1% in the quarter – that’s higher than any other ‘non-Covid’ quarter in the last decade. A little of that expenditure was fuelled by stimulus (government expenditure by proxy), but not much. Higher utility expenses and transport (including new car purchases) were big contributors to higher household expenditure. But because the comparisons of what households spend their money on is with other pandemic periods, its all still pretty abnormal anyway.

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The chart shows clearly that while household consumption played the major role in economic growth, business investment continued to be positive and general government expenditure also lifted.

 

Looking more closely at business investment, we can see here that annualised growth of 2.2% made its largest contribution of the last six years.

 image006

Increased business investment is theoretically good news, but like much of the higher household expenditure, the impact of Government stimulus in various forms has made itself felt over the last year.

 

As the chart here shows, expenditure on Dwellings (shown in purple) and the assets for business (shown in red and green) made their mark in the December and March quarters.

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However, though they were positive, they could not offset the 0.7% fall in the export contribution. With iron ore prices falling sharply and continued shipping and freight challenges, the export income contribution to growth is also likely to be negative in the September quarter, and possibly, sharply down.

Already at historic levels, expenditure on new dwelling construction and alterations and additions were consistent with the prior quarter, but they have been super-charged by national economic stimulus packages and are already softening, with more falls to come.

Whilst the underlying strength of the economy was evident with the bounce back in the previous 4 quarters commentators are suggesting a sharp decline in the September quarter with the December quarter dependent upon when lockdowns ease. With December quarter marginally positive or even negative the start to 2022 will be challenging.

 

Feed little to no migration and population growth, an end to stellar housing approvals, tightening lending rules, a fractious geo-political trading position and various lingering disruptions into the mix, and the dismal scientists will be out in force by early 2022. Wind back two years and perhaps this is a reminder that pre-pandemic, Australia was facing economic headwinds.

 

 

Posted Date: October 7, 2021

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