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Positive Journey Continues for the Recovery

In recent articles, I have taken to using musical references to try and make sense of the economic data. GDP was up +3.1% for the Dec 20 quarter which was a very strong result and builds on the increase, in the Sept20 qtr of +3.4%. So, to quote the Renee Geyer song from the 70’s, at this stage the recovery is “heading in the right direction”.

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Government support for the economy, while being phased down, still contributed some $22.3 billion to the economy with JobKeeper payments to employees of $11.90 billion– down from a peak of $35.76 billion, in September quarter.

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 So, what is making up the shortfall? The good news is we are all spending more and businesses are investing. 

In terms of household spending, the gap to the pre-COVID levels is narrowing and, at $7.4 billion, is just 2.7% below Dec qtr 2019 levels. 

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However, a note of caution… While there has been some improvement in the share of total income going to wages, which increased from 49.0% to 50.9% in the Dec qtr, most of this increase in spending has been driven by a reduction in savings built up during the lockdown. As can be seen in the following graph, the Household Savings Ratio declining from 18.7% to 12% in the Dec qtr.

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In terms of business investment, this was up during the quarter and contributed 0.7% to GDP growth. The challenge is that this improvement needs to continue and accelerate. As can be seen in the following graph, the gap to pre-COVID levels of $86.0 billion, in Dec 2019, has narrowed to $1.5 billion. However, even at these levels business investment is still down on the mining investment boom days when levels were typically nearer $100 billion per qtr.

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The good news for our industry is that business investment (gross fixed capital formation) includes spending on new dwellings plus alterations and additions.

At this stage, the public policy appears to be working. The practitioners of the black arts at the RBA and the Treasury will be pleased with the progress. The stated plan to phase down government assistance and provide incentives for people to spend and businesses to invest is evident at a macro level. However, the recovery will be patchy as some sectors such as hospitality, tourism and education continue to struggle as international borders remain closed.

 

Posted Date: April 22, 2021

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