CBA sees a big boost in 3Q GDP

CBA are out with their expectations for Q3 GDP, which they reckon will increase on a real basis by 2.5%, easing the 2020 COVID recession losses.

Here’s the report:


Annual growth, revisions aside, should lift to ‑4.4%.
Household consumption will increase sharply while dwelling investment, public spending and inventories will add to growth.
Net exports and business investment will be a drag on growth.
We expect nominal GDP to increase by 3.0% which would see annual growth lift to ‑4.2%.

When GDP and employment collapsed in Australia over Q2 20 comparisons were made with the Great Depression.  We had not seen such a sharp deterioration in economic data since the 1930s.  But the similarities between the Great Depression and the COVID‑19 pandemic from an economic perspective only pertain to the Q2 20 activity data.  The economic recovery is now well underway and the domestic data over recent months has generally surprised to the upside.

The Q3 20 national accounts due for release on Wednesday will confirm that the Australian economy expanded in the September quarter.  Restrictions were eased in most jurisdictions and that underpinned a lift in economic activity.  On our estimates real GDP rose by 2.5% in Q3 20.  That is not as strong as the 4.0% increase in hours worked over the same period.  The difference is reconciled by the nature and type of industries that have been more heavily impacted by shutdowns and re‑openings.  More specifically, labour intensive industries (e.g. hospitality & recreation) have been more severely impacted from the pandemic than capital intensive industries (e.g. mining, manufacturing and agriculture).  In Q2 20 hours worked fell by more than GDP.  The reverse will have occurred in Q3 20 ‑ hours worked will have increased by more than production.

The breakdown of GDP (E) is expected to indicate that most components of domestic final demand contributed to growth.  In contrast, the external sector will be a drag on growth because export volumes fell while import volumes rose sharply.  In summary, the data for Q3 20 is expected to show:

a large increase in household consumption: CBA(f) +6.2%;
a small rise in residential construction because of a big lift in alterations and additions partially offset by a decline in new construction: CBA (f) +0.7%
a modest fall in business investment: CBA(f) –2.1%
a decent lift in public demand because of strong growth once again in recurrent expenditure: CBA(f) +1.4%;
a small fall in inventories which will add 0.9ppts to growth
a large 2.0ppt negative contribution to growth from net exports.

The 0.7% increase in the terms of trade over Q3 20 will have a positive impact on nominal GDP which will also reflect the lift in consumer inflation over the quarter (recall that the Q3 20 CPI was 1.6%/qtr and the trimmed mean was +0.4%/qtr).  We have the GDP deflator at 0.5% in Q3 20 which means we expect a quarterly increase in nominal GDP of 3.0%.

The household income account will be a particular focus for us in Wednesday’s national accounts.  Very early on in the pandemic we were able to identify, using our internal data, that a positive income shock to the household sector was underway.  That was confirmed in the Q2 20 national accounts.  Our internal data indicates that the positive income shock continued over Q3 20.  As such, we expect to see a big disparity once again between household income and consumption over the September quarter even though we expect the savings rate to fall (CBA (f) is for the savings rate to be 16.4% in Q3 20 from 19.8% in Q2 20).

There will be a lot of focus on Wednesday’s data, particularly amongst the economic commentariat.  But it’s worth remembering that GDP is backward looking.  Things are moving quickly and whilst the Q3 GDP data is important, at this juncture financial markets are more interested in what the strength and duration of the economic recovery will look like in 2021 and beyond.  On that score we are optimistic.  There is plenty of evidence in the forward looking data that signals strong outcomes next year are more likely than not and we hold an above‑consensus view on the Australia economic outlook

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