Thanks to Westpac’s always excellent Andrew Hanlan:
The Australian National Accounts, to be released on Wednesday December 2, will provide an estimate of economic activity for
the September quarter.
This year has been the most extraordinary period. The nation endured an unprecedented temporary and partial shut-down in an effort to contain the spread of covid.
This led to a severe recession over the first half of the year, output contracting by 0.3% in the March quarter and then plunging by 7.0% in the June quarter.
The September quarter saw output rebound as restrictions were rolled back. The rebound in the quarter was limited by Victoria’s second lock-down, which has since come to an end.
The key dynamic is that the covid restrictions limited the movement and travel of households – thereby significantly curtailing the opportunity of consumers to spend. As the restrictions were eased, consumers were able to return to the shops in much greater numbers.
We anticipate that output increased by 3.0% in the September quarter, which would still leave it some 3.9% below a year earlier and even further below the base line in the absence of covid.
The labour force survey reports that hours worked lifted by 4% in the September quarter. Hours worked collapsed in the June quarter, down by 9.8% in the national accounts (although the labour force survey reported a slightly more modest decline of 8.4%).
The arithmetic of our Q3 forecast is: domestic demand +3.4%; total inventories +1.4ppts and net exports -1.7ppts.
Within domestic demand, the expected detail is: consumer spending +6.0%; home building, +0.5%; real estate, +14%; business investment, -3%; and public demand, +1.2%.
One of the key features of the covid recession is the sheer magnitude of the income transfer from the government sector to households and businesses.
By way of context, taxes less subsidies deteriorated by $56bn in Q2. The upshot, total factor incomes (wages and profits) actually grew in Q2, up by 3.8%, rather than tracking nominal GDP, which declined by 7.6% in the period.
On the consumer, 53% of domestic demand, the national accounts provide us with a detailed update on spending, saving and incomes. Of note, the household saving ratio spiked to 19.8% in Q2, up from 3.6% at the start of the year – boosted by income transfers from the government. This strengthening of the household balance sheet enables consumers to lift spending as confidence improves.
Looking beyond the September quarter, near-term the end of Victoria’s second lock-down and success in containing the virus locally will support a further rebound in activity.
The 2021 year will be a period of transition as the momentum from the reopening effect fades. Legacies from the virus, social distancing and international travel restrictions, and legacies from the recession, high unemployment, as well as the fragilities pre COVID, will act to temper the pace of recovery. That said, positive news on vaccines is encouraging.
Household consumption (6.0%qtr, -7.6%yr): Consumer spending plunged by an unprecedented 12% in the June quarter, associated with the nationwide partial lock-down and the closure of borders, including the national border.
Spending rebounded in Q3, albeit tempered by Victoria’s 2nd lock-down, up by an expected 6% (although we note considerable uncertainty around this forecast).
Retail sales, down 3.5% in Q2, jumped 6.5% in Q3, with folk spending more in retail categories. Across services spending trends will vary following some dramatic results in Q2, e.g. transport services, -86% in Q2; and hospitality, -56% in Q2.
Dwelling investment (+0.5%qtr): Home building activity grew in Q3, up an estimated 0.5%, breaking an 8 quarter run of declines and a sharp turnaround from a -6.8% for Q2. Work on detached houses rose, +1.1%, so too renovations, +4.6% following a -5%, together more than offsetting a further and sizeable fall in work on units, down 6%.
New business investment (-3%qtr): Business investment is hit hard by recessions, including this covid recession, with a jump in excess capacity and increased uncertainty.
Investment fell by 3.5% in Q2 and by a forecast further 3% in Q3. Construction work is understandably falling (commercial building -6.4% in Q3), so too spending on equipment, -2.2%.
Public spending (1.2%qtr, 5.9%yr): Public demand, 27% of the economy and half the size of consumer spending, has been expanding at a brisk pace for 6 consecutive years now (2015 to 2020). The covid response, including stockpiling of health supplies, has added impetus to government spending.
Net exports (-1.7ppts qtr, -0.2ppts yr): Import volumes, up an estimated 6.5%, rebounded following a 19% fall over the first half of the year as the domestic economy reopened. Exports fell further, -2.4% we estimate, hit by the global recession.
Private non–farm inventories (1.0% qtr, +1.4ppts contribution):
Business non-farm inventories (often volatile) fell by a sharp 3% in Q2 as sales and output collapsed. A partial rebuild, +1%, as the economy reopened and aided by a flood of imports, will see inventories add 1.4ppts to activity in Q3.