- Q2 GDP growth was stronger than expected;
- All agree that things have taken a sharp turn for the worse in Q3;
- But next year is still likely to be a good one for the economy;
- The economy will be supported by very low interest rates;
- It may yet require further fiscal support.
The June quarter national accounts data was the threatening storm that never arrived. GDP growth in Q2 was 0.7%, a pretty decent number. In the quarter there was plenty of consumption, infrastructure spending and the frenzied activity in the housing market. Exports and inventory investment were the soft spots.
The Q2 GDP number could have been even higher. Lockdowns did not help. There were also shutdowns in the mining sector impacting exports. But a more substantive reason was that the economy was constrained by supply-chain problems and labour shortages.
Farmers have done very well, as have the retail, wholesale trade and road transport sectors. It is the service sectors that have been doing it very tough (particularly Air and Rail Transport) impacted by the lack of people movement and gatherings.
The big potential upside for the service sectors is the high level of household saving. Although down from its 2020 peak, it is above the average rate recorded in the decade prior to COVID. The domestic and international experience is that saving rates decline as restrictions are eased, with service sectors a beneficiary.
The economic outlook for Q3 has evolved dramatically even just over the past month. The weaker growth comes down to two causes. Tighter government restrictions in NSW, Victoria and the ACT has substantially reduced the amount of economic activity that is able to be done. And the decline in business and consumer confidence (particularly in those regions) means there has been a decline in the desire to do things.
The international evidence is that rising cases has moderated economic activity, even in those countries with relatively high vaccination rates. But the experience of the US and Europe is that while rising case numbers has some impact upon economic activity even with higher vaccination rates, the impact is weaker than over the past year.
The virtual certainty that GDP growth will be heavily negative in Q3 has led to a discussion about the possibility of a ‘technical’ recession. It is widely agreed in this slowdown that the (likely) short (but very sharp) duration of the slowdown and the size and shape of government income support programs will result in only a modest rise in the unemployment rate. The labour market impact of the economic slowdown will be more evident in other indicators, such as less hours worked and a declining participation rate.
Another sign of a recession is a dramatic fall in national income growth. But Government support programs have largely offset much of the fall from the decline of household and business incomes (albeit at the cost of larger budget deficits and higher government debt). In any event, the technical definition of a recession is unlikely to hit this year.
To read my full update, click here.
We live in interesting times.
Peter Munckton - Chief Economist