December GDP lower – big hit coming for March and June quarters

Back a lifetime ago, at the start of March, Australia’s economic growth for the December quarter was reported at 0.5%, a little higher than most economists predicted, even if still too low to represent clear evidence of economic improvement. If a month is a long time ago, then the 2019 December quarter growth number is pretty much meaningless in early April 2020.

That said, 2019 ended with annualised GDP reported at 2.2%, the same as reported for 2018, and as Phil Coorey wrote in the Australian Financial Review, “…the Australian Bureau of Statistics suggested the gentle turning point in the economy that had been predicted by the Reserve Bank of Australia may have occurred.”

We can see this modest improvement in the chart below.



Fig. 2

To go straight to the dashboard and take a closer look at the data, click here.

The impact of the 2019-20 bushfire season wrought such pain, some of it economic, that many economists were predicting the March quarter would see negative growth in Australia. The rapid and truly unprecedented nature of the pandemic’s spread and its impact make that even more likely, and no one believes the June quarter will deliver positive economic growth. Australia will be officially in the technical recession in which in practical terms, we are already living. Coorey quipped in his AFR missive, “…the gentle turning point is about to become an S-bend.”

How deep and long the likely recession will go is unclear, but there is nothing short-term about the current situation. So deep is it, that the ‘D’ word has been deployed by even the most cautious and sensible commentator.

One feature of a generally well-run economy is that it retains in the hands of government and its agencies, quite a deal of residual capacity, in a variety of forms. The national balance sheet has not had a great deal of leverage (national debt has been fairly low, despite the political postulations) and the RBA trades the currency to make money for the future as examples.

As the next chart shows, the contribution of Government expenditure in sustaining economic growth is already significant. In the December quarter it contributed 1.0% of the 2.2% year-end growth, while household consumption contributed 0.8% having fallen from a solid 1.2% per annum a year earlier. We can expect to see Government’s general expenditure and contribution to any growth being the sole positive in the June quarter and possibly, the March quarter as well. That is what having a capable economy is all about, in times of national need.


Fig. 3

To go straight to the dashboard and take a closer look at the data, click here.

All that aside, it is little comfort that Australia is not alone in the current situation, even though a series of good fortunes contribute to placing Australia in a better position than most to recover well, when the crisis eventually subsides. This is, for now, and for some time to come, very much a global situation.

Writing in the Australian Financial Review, the illustrious Kenneth Rogoff (former Chief Economist of the IMF) tolled a bell for global economic conditions:

“The odds of a global recession have risen dramatically, much more than conventional forecasts by investors and international institutions care to acknowledge. Policymakers need to recognise that, besides interest rate cuts and fiscal stimulus, the huge shock to global supply chains also needs to be addressed.”

The reality is that supply chains take time to realign and a bottle-neck at one point, a shortage in another, must eventually wind its way through the global economy, from stage-to-stage, until ultimately it is resolved.

We can think of it as like the effect of throwing a stone into the middle of the pond. The ripples might be less intensive the further we move from the epicentre, but their effect is none-the-less obvious. When we toss a rock into the centre of the pond, the effects are massive, take longer to dissipate and splash a whole lot of water out of the pond altogether.

When it comes to global economic growth, the waves of disruption are already massive, slowing growth and making recovery to even a settled pond seem a distant prospect right now.