'Extraordinary': Dissecting historic GDP decline

Australia’s first recession since 1991 has been confirmed. 

But what a three months the June quarter was. Such are the “series of unprecedented events”, the Australian Bureau of Statistics today revealed it would this month publish a further paper “bringing together the stories” from the jaw-dropping economic statistics. 

Until then, the ABS’s hotly anticipated national accounts today showed that real GDP – or output – dived 7 per cent in the three months to the end of June, the largest since World War II, as restrictions to contain the coronavirus crunched household consumption. That built on the 0.3 per cent contraction in the March quarter, delivering a "technical" recession and officially ending 28 years of consecutive growth, an outcome Treasurer Josh Frydenberg lamented was a “devastating blow” inflicted by the pandemic. 

In dollar terms, the quarter's GDP of $446 billion was the lowest since the end of 2016, suggesting almost four years of growth has been wiped out. 

“This is by far the largest quarterly contraction in the Australian economy on record,” said Westpac chief economist Bill Evans, labelling as “extraordinary” the numbers in the national accounts. 

So, how did this happen, how does it compare and where to from here? 
 

Firstly, despite the severity of the decline, the 7 per cent plunge – or 6.3 per cent over the year – was about what economists expected, the market median forecast being a 6 per cent quarterly contraction. And it was basically all driven by households, the 12 per cent slump in consumer spending – which represents 56 per cent of GDP – explaining 98 per cent of the overall contraction in GDP, according to Westpac Economics.

In a quarter that was always going to be bad around the world as countries locked down and restricted activity, it’s worth noting that Australia also fared relatively well internationally.

On the ABS’s numbers, the UK fared the worst, down a massive 20.3 per cent, Europe 12.1 per cent, the US 9.1 per cent and Japan 7.8 per cent. 
 

Still, Australia’s experience in the June quarter has “incredible historical significance”, said Mr Evans, noting the previous record was a 2 per cent fall in June 1974. 

Also, like a lot of things in the COVID-19 pandemic, it’s a somewhat bizarre recession – while output and employment plunged in the quarter, household incomes actually rose on the back of the spike in government payments. Think the JobKeeper wage subsidy scheme, which totalled $31bn in the period, and the “boosting cash flow for employers” policy. These boosted “non-labour income”, specifically earnings from “unincorporated businesses” (for example, sole proprietors), which in turn fed into the headline rise in household income. 

Another factor was the spike in social assistance benefits on the back of the JobSeeker coronavirus supplement for the unemployed and the one off $750 support payment. In contrast, “household compensation of employees” slid a record 2.2 per cent as employment and hours worked crashed.

All in all, gross disposable income rose 2.2 per cent in the quarter. 

However, with COVID-19 restrictions in place, households struggled to spend and upped their saving. Indeed, the household saving ratio jumped from 6 per cent to 19.8 per cent., the highest level since 1974. This would have been an even higher 24.8 per cent had other support initiatives, such as early access to superannuation, been included. 

“It’s a different recession to previous recessions that we have seen in Australia. It is faster and deeper than what we saw in the 80s and 90s,” Mr Frydenberg said today. 
 

“The other difference about what we are seeing now is the cohorts of people who are most impacted. In the 80s and the 90s, you saw some structural change in the Australian economy, particularly in the manufacturing sector, and you saw older people, mainly men, who are losing jobs. 

“Right now we have seen more younger people and more women lose jobs because of the sectors that they have been working in predominantly, hospitality, tourism, retail.”

In terms of consumer spending, the 12 per cent contraction in the quarter was driven by large falls among things most affected by restrictions, such as transport services (down 86 per cent), accommodation services (down 77 per cent), and recreational and cultural services (down 52 per cent). Spending on services overall fell 17.6 per cent. 

Other drags included the 3.5 per cent dive in business investment, 6.8 per cent slump residential construction and 18.6 per cent plunge in real estate activities. 

Net Trade contributed 1 percentage points to GDP as travel and tourism restrictions dragged on imports and exports, but the former fell more than the latter. Public demand, which accounts for a quarter of the economy, added 0.6 percentage points to GDP, driven by health-related spending and the use of the defence force to assist with managing the pandemic.
 

As for the states, NSW suffered the biggest quarterly contraction in demand, down 8.6 per cent, closely followed by Victoria’s 8.5 per cent slump. South Australia fared the best, down 5.8 per cent, with Queensland and Western Australia not far behind following contractions of 5.9 per cent and 6 per cent, respectively.  

With less than a month of the September quarter remaining, JPMorgan economist Ben Jarman said GDP “will have to lift” from the record decline in June even with Victoria’s restrictions to control its second wave. “But the recovery is not a straight-line path, and hours worked have stalled in recent weeks,” he said. 

Mr Evans added that – based on current policies – there would be a considerable scaling back of government support measures in the December quarter, albeit offset by the spike in savings in through June that would cushion households through the partial withdrawal of payments.

Ultimately, he said success in containing the virus was key to the path ahead, forecasting a flat quarter in September and a “strong recovery” in the final three months of the year, assuming Victoria moves to stage two restrictions and other states avoid second waves.

“The upcoming Federal budget, on October 6, provides the government with another opportunity to reassess and reset policy support,” he said. 

“The annual Budget will undoubtedly be expansionary, the question is the degree of additional stimulus and the form that takes. The bringing forward of already legislated income tax cuts is an appropriate action in the current environment.

“Overall, we expect that the net positive effect of the general reopening of the state economies on the consumer sector, including relaxation of key state border restrictions will underpin a strong recovery in the December quarter.”