GDP data from the Australian Bureau of Statistics shows that Australia is set to enter a recession after the economy shrank 0.3% in the March quarter.
It’s likely that the economic toll of the bushfires, as well as the early signs of an economic slowdown as a result of the coronavirus pandemic contributed to the economy’s dip, with a significantly larger contraction expected for the June quarter.
The ABC writes that “this makes it certain that Australia will suffer its first recession in 29 years, as the full impact of coronavirus-related shutdowns occurred during the current June quarter.”
While net exports increased, and Australians took to supermarkets at a rate larger than any other country, the gains weren’t large enough to combat a significant economic downturn.
The ABS says that household consumption fell by 1.1% for the quarter, with the largest drops in spending found in locations impacted by travel, tourism and social-distancing restrictions like hotels, cafes and restaurants, arts and recreation as well as transport services which were hit by a 12% drop.
With the public shift to predominantly purchasing essential goods and services, the retail sector recorded a 8.9% drop in activity.
Australia last recorded a recession in 1991 after two negative growth quarters that Paul Keating labelled as “the recession we had to have.”
Bruce Hockman, chief economist at the ABS said that “this was the slowest through-the-year growth since September 2009, when Australia was in the midst of the global financial crisis, and captures just the beginning of the expected economic effects of COVID-19.”
Treasurer Josh Frydenberg confirmed that Australia was set to enter a recession, but warned that it could have been significantly worse had the government not intervened.
“Treasury was contemplating a fall in GDP of more than 20 per cent in the June quarter. This was the economists’ version of Armageddon,” he said. “It was in this quarter – the March quarter – that consumer and business confidence fell to its lowest level on record. That the ASX 200 lost a third of its value and on the 16th of March, saw its biggest daily fall of 9.7 per cent on record.”
“When combined with the ongoing drought, which saw farm GDP fall by 2.4% in the quarter, and the devastating impact of the fires that were raging across many states, one looks back on the March quarter, and there wasn’t much good news.”
“Seen in this context, the fact that the Australian economy only contracted by 0.3% shows the Australian economy’s remarkable resilience,” Frydenberg continued to explain. “Indeed, Australia’s performance in the March quarter compares very well to that seen in other nations, with negative growth of 9.8% in China, 5.3% in France, 2.2% in Germany, 2% in the United Kingdom and 1.3% in the United States.”
Sarah Hunter of BIS Oxford Economics agreed with the treasurer that Australia has escaped the brunt of the economic damage, stating that “with the health outcomes tracking better than expected [which has allowed an earlier-than-anticipated end to lockdown conditions] and the government packages providing significant support to household income, the decline in GDP in the first half of 2020 will be relatively small when compared to other economies,” she said.
“We now expect the peak-to-trough fall in GDPR to be significantly less than 10 per cent,” she added. “Although the immediate outlook is better than anticipated a couple of months ago, the economy still faces challenges,” Hunter conceded.
“The size and speed of the decline are unprecedented and, as currently legislated, there is a substantial policy cliff edge at the end of the third quarter [when the majority of the additional support for households comes to an end] that must be navigated,” she said.
The ABC’s report also states that as a result of standing on the edge of a ‘fiscal cliff’, Australians are more likely to be saving money for an unexpected emergency after having faced the pandemic. This was backed up by the ABS’ results that household spending had dropped dramatically in spite of a 6.2% increase in social welfare payments.
“Households have already moved to boost precautionary savings, with the savings rise jumping from 5.5% from 3.5% in the fourth quarter of 2019 even as income was boost by social assistance benefit,” Jo Masters, EY’s chief economist said.
“This shift reflects the intensifying headwinds to spending… households are absorbing higher unemployment, elevated job insecurity, falling house prices, concerns about a second COVID-10 outbreak, all against a backdrop of already high debt levels,” she concluded.