- The lockdowns will almost certainly see Q3 record negative GDP growth;
- Assuming lockdowns end in the next few weeks there should be a strong bounce in growth in Q4;
- In Q1 National saving hit its highest level in over 30 years;
- The decline in Government saving was more than offset by higher private sector saving;
- Caution and inability to spend was part of the answer;
- A bigger part is the very high level of the terms of trade;
- The current lockdown may see a temporary bounce in saving;
- Household and business saving will likely decline over the next next year.
The latest lockdown will have a significant hit on economic growth. It is increasingly hard to see how Q3 will not be a negative quarter (current thinking is -0.5%). How negative will depend upon how long the lockdowns last. A very strong GDP number (1.7%) is the most likely outcome for Q4. This assumes that we don’t get another COVID wave later in the year.
Last year the national saving ratio hit its highest level in over 30 years. Over the past fifteen-plus years movements in that ratio largely reflected changes in the terms of trade (the price of exports relative to the price of imports). If the relationship holds it suggests that national saving is likely to decline as the commodity price cycle turns.
Different sectors save at different rates. The massive increase in private-sector saving in 2020 was matched by a massive fall in government saving. Over the next year government saving will continue to be negative as budgets are set to provide ongoing strong fiscal support. But once economic growth reaches target governments are likely to focus on re-building their saving.
Last year household saving exploded. More of the increase in saving was due to the weakness of spending than the rise of income. The extent of the current lockdown in Sydney (and other cities) means there is a chance that saving may rise in the current quarter. But once the lockdown ends household saving is likely to decline.
There will also likely be changes to the composition of household saving. Surveys indicate a decline in the proportion of households wishing to put their money into deposits or pay down debt. Both proportions though remain above their pre-GFC level. The sharemarket is looking more attractive to households, as does the attraction to Super for a number of households.
Last year there was also a significant rise in corporate saving. Over the next couple of years there will almost certainly be a decline in business saving. Businesses are very confident about the profit outlook (at least until the recent lockdowns). But competition for labour and materials will mean that cost growth will be higher. Dividends will rise. Cash levels in the corporate sector overall is at a high level (although cash flow is an issue for some SMEs).
To read my full update, click here.
We live in interesting times.
Peter Munckton - Chief Economist