Australia’s economy contracted in the first three months of the year, setting up an end to a nearly 29-year run without a recession as an even deeper slowdown looms for the current quarter.
Gross domestic product fell 0.3 per cent from the final three months of 2019, the first quarterly drop since 2011, brought down by a collapse in household spending, statistics bureau data showed in Sydney on Wednesday. Economists had forecast a 0.4 per cent drop. From a year earlier, the economy expanded 1.4 per cent, matching estimates.
The Australian dollar edged a little lower after the release, and traded at $0.69 at 7.06am UAE time.
The result sets up an end to Australia’s record run of avoiding two consecutive quarters of shrinking GDP, having dodged recessions during the 1997 Asian Financial Crisis, the dot-com bubble and the 2008 global financial crisis. The current quarter will see a deep contraction, with almost 600,000 jobs lost in April alone and much of the economy in lockdown to contain the coronavirus.
Treasurer Josh Frydenberg, speaking after the release, accepted this fate when asked directly whether the economy is now in recession.
“The answer to that is yes,” he said. “That is on the basis of the advice that I have from the Treasury Department about where the June quarter is expected to be.”
Fiscal and monetary policy have been introduced to rebuild the economy. The Reserve Bank of Australia has taken the cash rate near zero and lowered the cost of borrowing with its 0.25 per cent bond yield target. The government has injected tens of billions of dollars into the economy to help tide businesses and households through the lockdown.
With the containment of the health crisis allowing activity to resume, the critical question is how quickly businesses can get back on their feet, workers regain employment and households resume spending.
“Growth should resume in the September quarter, but the impact of Covid-19 will surely cast a long and lingering shadow over the global economy and Australia’s recovery,” said Callam Pickering, an economist at global jobs website Indeed, who previously worked at the central bank. “Continued support from fiscal and monetary policy will be necessary throughout 2020 and beyond.”
Today’s report showed household spending tumbled 1.1 per cent, shaving 0.6 percentage points off GDP, driven by a 2.4 per cent drop in services expenditure. Restrictions particularity affected spending on travel, hotels, cafes and restaurants
Government spending jumped 1.8 per cent, adding 0.3 percentage points. Payments to provide support during the pandemic are expected to rise in the current quarter
The savings ratio advanced to 5.5 per cent from a downwardly revised 3.5 per cent in the fourth quarter
House building fell 1.7 per cent, reflecting continued weakness in approvals and non-mining business investment fell 1.7 per cent, while mining investment rose 3.6 per cent as miners invest in new technologies and automation.
Rising commodity prices are boosting miners’ profitability, with the terms of trade 2.9 per cent higher in the first three months of 2020, pushing the current account surplus to a record A$8.4 billion (Dh21.4bn). Yet, miners will be keeping a watchful eye on the nation’s currency, which has surged almost 20 per cent in the past two-and-a-half months.