The miracle economy? How else to describe the GDP data for the September Quarter. On the back of the worst quarter on record in June where the economy contracted by 7.0% we have now bounced back in the September quarter (admittedly off a low base) with growth for the quarter of 3.3%.
Our industry has led the charge. Housing approvals for Australia were up 2.7% to 177,654 year-ending October. Standouts were Victoria which was up 13.6% and WA up 4.7% on an annualised basis. This strength in demand is underpinned by Building work done which in the September quarter was up 1.1% for new house construction over the previous quarter and up 5.1% for Alterations & Additions.
Not surprisingly housing finance continued to expand for the 5th month in a row. Significantly for our industry loans for construction of new housing or purchase of newly built housing hit $5.1 billion in October up on $4.8 billion in September and well above the trough in February when loans for this activity plunged to $3.1 billion.
Collectively all this activity has seen softwood timber sales continue to strengthen with sales in the FWPA softwood data series moving up to 3.04 million m3 year-ending October nearing the previous peak of 3.17 million m3 in June 2018.
Is this sustainable when the normal drivers of housing demand are challenged? Household formation rates have been turned on its head with the collapse in migration due to COVID 19. Unemployment is also increasing although at a lesser rate than previously expected. Plus underemployment continues to rise suggesting people in work are not currently obtaining the hours of work they are seeking.
At the macro level the key is the transition outlined in the October budget. The expectation is that the significant support payments currently being provided will be wound back by March 2021. This is the “fiscal cliff” some commentators are referencing. As can be seen in Chart 1. Government support has increased from a base level of some $1.54 billion per quarter with outlays on JobKeeper running at just under $36 billion in the September quarter.
As these payments recede the budget has provided incentives with tax deductions and investment allowances to encourage consumers to spend and business to invest. In addition the Reserve Bank has reduced interest rates to even lower lows. So the key thing to keep an eye on in coming months is whether Business investment and Household consumption step up to meet the shortfall. The extent of the gap can be seen in Chart 2
To get back to pre-COVID levels in these areas, business investment will need to increase some $5.8 billion while Household consumption will need to increase $18.5 billion. This is not a one off but an increase in activity required each quarter here on. Whether this happens or not is effectively the $24.3 billion question hanging over the economy. At present household consumption is moving in the right direction with an increase in September quarter of 7.9% while business investment was flat. Spending in these areas will need to accelerate through 2021 to compensate for the phase out of JobKeeper.
Improvement in these areas is just part of the recovery process to get back to where we were. Given the economy had previously been growing at 2-3% annually coming back from the collapse in the March and June quarters is likely to take several years. For instance, the drop in June of -7% while huge was really 8.4% below the medium -term trend. The relationship of current GDP to trend can be seen in the following chart.
Greg Jericho in a recent article in the Guardian makes the point “After the strong growth in September we are now 6% behind that trend. That 6% loss of expected output is the real sign of how big of a hole we are in. In September Australia’s economy was effectively the size it was three years ago.”
So we are on the right track but with a lot of work ahead.
