Australia’s economy contracted by the most on record in the second quarter, underscoring the need for unprecedented stimulus measures as the recovery from the nation’s first recession in almost 30 years is buffeted by Victoria state’s renewed Covid outbreak and lockdown,
Gross domestic product plunged 7 per cent from the first three months of the year, the largest fall since records dating back to 1959, the statistics bureau said in Sydney on Wednesday. The slump was larger than economist forecasts of a 6 per cent drop. From a year earlier, GDP tumbled 6.3 per cent versus an estimated 5.1 per cent fall.
The Australian dollar fell after the report and was trading at 73.52 US cents at 1:02pm in Sydney (7:02am in UAE).
Australia’s early lifting of restrictions and reopening of its economy is now being offset by an almost two months long lockdown in Melbourne, the nation’s second-largest city with about 5 million people. That is delaying the economy’s recovery.
“While the drop in GDP last quarter wasn’t much larger than the RBA [Reserve Bank of Australia] had anticipated, it will keep the pressure on the bank to announce more stimulus,” said Marcel Thieliant, senior economist for Australia at Capital Economics.
The RBA on Tuesday expanded a lending facility for banks to A$200 billion ($147bn/Dh539.4bn) to help keep interest rates low for borrowers and keep credit flowing. Governor Philip Lowe also said that the board “continues to consider how further monetary measures could support the recovery”.
The central bank and government are working in tandem to try to support the economy. The former has kept its cash rate near zero and set a target of 0.25 per cent on the three-year government bond yield, and the latter is extending its labour market assistance package.
The report on Wednesday showed that household spending – which accounts for about 56 per cent of the economy – slumped 12.1 per cent, subtracting 6.7 percentage points from GDP, while government spending rose 2.9 per cent, adding 0.6 percentage points.
Investment in new and used dwellings fell 7.3 per cent in the quarter. Net exports contributed 1 percentage point to GDP and the savings rate soared to 19.8 per cent, the highest rate since 1974, according to the government data.
The RBA predicts Victoria’s renewed lockdown will lift national unemployment to about 10 per cent later this year. The government, meantime, has injected tens of billions of dollars into the economy including its signature JobKeeper wage subsidy programme designed to keep workers attached to firms as it tries to maintain employment connections until activity can resume.
The economy’s deep contraction was heavily driven by services. The data showed transport services, which includes airlines, plunged 85.9 per cent and hotels, cafes and restaurants tumbled 56.1 per cent. Reflecting the government’s response to support the economy, social assistance benefits soared by 41.6 per cent.
“The virus shock is a services shock. Around two-thirds of the slump in GDP can be accounted for by just four segments of household spending –vehicle use, travel, recreation and culture, accommodation and hospitality spending. The sharp declines in these segments during 2Q sets up the possibility that Australia’s economy avoids a further contraction in GDP in 3Q despite the Victorian lockdown,” James McIntyre, a Bloomberg economist, said.
Australia’s record run of avoiding two consecutive quarters of negative GDP, which included avoiding recessions during the 1997 Asian Financial Crisis, the Dot Com Bubble and the 2008 global financial crisis, has come to an end. It now joins much of the world in succumbing to a pandemic-induced downturn.
Australia saw a record current-account surplus of A$17.7bn in the three months to June, aided by the nation’s closed international borders, which is keeping people from traveling abroad.
Yet its trade position has also fuelled the nation’s currency, which soared almost 30 per cent from a nadir in March.
The central bank’s expanded Term Funding Facility, in addition to supporting the economy, should also help ease some of the upward pressure on the currency by confirming the RBA’s commitment to keeping conditions accommodative until activity recovers.
