End of an era: Q1 fall in GDP signals end of recession-free run


    Australia’s real GDP shrank by 0.3 per cent in the March quarter, signalling the end of almost three decades of recession-free growth. The March quarter also saw us record our fourth consecutive current account surplus. The RBA left its policy settings unchanged at its monthly meeting this week, while indicating it might be feeling just a little bit more optimistic about the economic outlook. Consumer confidence rose for a ninth consecutive week. National home values fell in May, ending a 10-month long run of increases.

    This week’s readings include the implications of the corona virus crisis (CVC) for Australia’s payment systems, the ANU’s Asian strategy for a COVID-19 recovery program, the Age of Magic Money and the economics of cyber risk.

    Many thanks to those readers who were able to join us for this week’s webinar on how the CVC has been reshaping the international economic landscape.

    Finally, please note that I will be enjoying some leave next week, so the Weekly note will also be taking a short break. We should be back the following week. Meanwhile, we do still plan to put out the regular podcast.

    What I’ve been following in Australia . . .

    What happened:

    According to the ABS, Australia’s real GDP fell 0.3 per cent in the March quarter (seasonally adjusted) although output was still up 1.4 per cent in annual terms.

    Australia: Real GDP 050620

    Adjusting for population growth, in per capita terms GDP shrank by 0.7 per cent over the quarter and was flat relative to the March quarter of 2019.

    Australia: Real GDP per capita 050620

    What growth there was in the first quarter was driven mainly by government consumption and net exports, with the former adding 0.3 percentage points to quarterly growth. Net exports added a further 0.5 percentage points, although note that this was not due to export strength, but rather to the fall in imports outpacing the drop in exports. Private domestic demand meanwhile subtracted 0.8 percentage points from the quarterly growth outcome, led by a sharp fall in household consumption, which alone subtracted 0.6 percentage points. Dwelling investment and private business investment likewise made negative contributions.

    Australia: Contribution to real GDP growth, Dec 2019 to Mar 2020 050620

    Household consumption fell 1.1 per cent in the March quarter and was down 0.2 per cent over the year. That fall reflected an unprecedented 2.4 per cent drop in services consumption that was only partly offset by a one per cent increase in goods consumption. There were particularly sharp declines in spending on hotels, cafes and restaurants (down 9.2 per cent), on transport services (down 12 per cent) and on spending on clothing and footwear (down 8.9 per cent).

    Australia: Real household consumption 050620

    Households also increased their rate of savings, with the ratio of household savings to income rising by two percentage points to 5.5 per cent, driven by a combination of rising gross disposable income and falling consumption. That rise in household income was the product of a 6.2 per cent increase in social assistance benefits paid, due to both an increase in the number of recipients and the introduction of new support packages in response to COVID-19 and to the bushfires.

    Australia: Household saving ratio 050620

    New private business investment fell 0.8 per cent over the quarter and was down 2.6 per cent over the year. That drop was the product of a 1.7 per cent quarterly fall in non-mining business investment, which was also down 6.6 per cent over the year. In contrast, mining business investment rose 3.6 per cent over the quarter and increased 10.3 per cent over the year.

    Australia: New Business Investment 050620

    Dwelling investment dropped 1.7 per cent over the quarter, its seventh consecutive quarterly decline, to be down 9.7 per cent in annual terms.

    Australia: Private Investment in dwellings 050620

    By industry, the biggest falls in activity were concentrated in services, with large declines in accommodation and food services, transportation and postal services, other services, administration and support services, and arts and recreation services.

    Australia: GDP growth by industry, Q1:2020 050620

    By state and territory, the largest quarterly falls in activity were in New South Wales (where state final demand was down 1.5 per cent), the Northern Territory (down 1.2 per cent) and South Australia (down one per cent), while the largest increases were enjoyed by the ACT (up 2.1 per cent) and Western Australia (up 0.9 per cent).

    Australia: State final demand, Q1:2020 050620

    Why it matters:

    The Q1:2020 GDP result marks only the fourth time that headline GDP has contracted since the early 1990s recession. It also marks the end of an era that began back in the September quarter of 1991. Using the (contested) definition of a recession as two consecutive quarters of negative growth, Australia managed to rack up an incredible 114 consecutive quarters of recession free growth between Q3 1991 and Q4 2019. With Q2:2020 set to capture the bulk of the economic fallout from the coronavirus crisis (CVC), the quarterly drop in output in Q1 means that astonishing run is now over. Australia managed to keep growing through the Asian Financial Crisis, the Dot.com crash, the Global Financial Crisis, and the Eurozone crisis, along with the other economic and political shocks that punctuated the last three decades. But not through COVID-19.

    Australia: Real GDP Growth 050620

    The Q1 GDP result is also a kind of bridge linking the pre- and post-COVID-19 economic environments, as well as capturing the economic fallout from this summer’s bushfires. So, some of the data seen here are clearly influenced by the virus and the public health response – the outsized drop in household spending on services, the jump in government consumption spend, and the sharp fall in imports. The two percentage point bump in the household savings rate also fits with this story, and with our understanding that previous pandemics have likewise been associated with marked increases in precautionary savings.

    But in other ways, the Q1 data is a continuation of some pre-existing trends. Household consumption growth had already been lacklustre well before COVID-19 for example, as had private business investment. The fall in the latter as a share of GDP deepened in the March quarter, taking the ratio to its lowest level this century and to multi-decade lows, but that fall continued a decline that had started in late 2017, after the economy had already negotiated its way down the mining investment cliff.

    Australia: New Private business investment as a share of GDP 050620

    Similarly, the fall in dwelling investment as a share of GDP in the March quarter not only took that ratio down to its lowest since 2013, but also continued a decline that has been underway since 2018.

    Australia: Private Investment in dwellings 050620

    Finally, the story of an economy where growth is being driven more by public than private demand is not particularly new, either. Granted, it’s true that public spending in response to first the bushfires and then the CVC has now taken government consumption expenditure to a new record high.

    Australia: Govt consumption and total public investment 050620

    But the trend of weak growth in private demand and strong offsetting growth in public expenditure has also been a feature of the past couple of years.

    Australia: Public vs Private Demand 050620

    This mixing of the old and new is likely to come to an end next quarter, however, with the June results set to be dominated by the impact of the CVC, marking the transition of the Australian economy into a new era and bringing to a definitive end our remarkable run of growth.

    Finally, it’s also worth noting that Australia’s Q1 GDP result looks pretty good when set against many of the world’s leading economies.

    Selected economies: GDP Growth in Q1:2020 050620

    What happened:

    Australia posted an $8.4 billion current account surplus in the first quarter of this year, according to the ABS. The current account surplus was driven by a trade surplus of $19.2 billion and a narrowing of the net income deficit to $10.6 billion. As a share of GDP, the current account surplus rose to 1.7 per cent.

    Australia: Current Account Balance 050620

    This was Australia’s fourth consecutive quarterly surplus and a record in dollar terms.

    Why it matters:

    The ABS pointed out that the impact of COVID-19 was apparent in several features of the March quarter’s balance of payments results. For example, the volume of goods imports fell for a range of consumption and intermediate goods due to supply chain disruption in China in February, while in March there was an increase in imports of computing equipment as households invested in working from home. At the same time, travel restrictions triggered large falls in services exports and imports. The impact of the CVC was also felt on the financial account, with the ABS pointing to ‘a surge in activity as investors sold off financial assets and sought liquidity from financial intermediaries.’

    What happened:

    The ABS reported that Australia recorded a trade surplus of $8.8 billion in April 2020. Exports of goods and services fell 11 per cent over the month, reflecting sizeable drops in exports of non-rural goods (down eight per cent), non-monetary gold (down 47 per cent) and services (down 13 per cent). Imports of goods and services also declined in monthly terms, dropping by 10 per cent, with imports of intermediate and other merchandise goods down by five per cent and imports of non-monetary gold dropping by 40 per cent. Imports of services slumped by 42 per cent.

    Australia: Trade balance 050620

    Why it matters:

    While April’s trade surplus was down by more than $1.6 billion on March’s record outcome, it was still a sizeable result and suggests that the March current account surplus noted above is on track to be followed by another surplus in the June quarter.

    The trade data for April also show the CVC continuing to take a toll on both exports and imports, particularly services, with tourism-related travel services maintaining their dramatic slump.

    Australia: Tourism related services trade 050620

    What happened:

    At its meeting on 2 June, the RBA said that it would maintain its current monetary policy settings, including the targets for the cash rate and the yield on 3-year Australian Government bonds of 25 basis points.

    Why it matters:

    In another sign of the strange times in which we live, recent RBA monetary policy meetings have been something of a non-event: no significant change is expected in current policy settings for some time, and with the central bank having been successful in delivering its targets of stabilising markets and pegging three-year government yields at around 0.25 per cent, there has been little short-term pressure for any change in its current operating framework (longer term may well be a different matter, of course).

    Perhaps the most notable feature of this week’s statement, then, was some indication that the central bank is becoming a little more optimistic about the outlook for the Australian economy, noting that ‘it is possible that the depth of the downturn will be less than earlier expected. The rate of new infections has declined significantly and some restrictions have been eased earlier than was previously thought likely. And there are signs that hours worked stabilised in early May, after the earlier very sharp decline. There has also been a pick-up in some forms of consumer spending.’ A look back at last week’s note and the accompanying video will remind readers that we have reached a similar conclusion based on recent developments. But the RBA is – rightly – remaining extremely cautious, with the statement going to stress that ‘the outlook, including the nature and speed of the expected recovery, remains highly uncertain and the pandemic is likely to have long-lasting effects on the economy. In the period immediately ahead, much will depend on the confidence that people and businesses have about the health situation and their own finances.’

    What happened:

    The ANZ-Roy Morgan weekly Consumer Confidence Index rose 5.6 points to 98.3.

    Australia: ANZ Roy Morgan Consumer Confidence 050620

    Why it matters:

    The recovery in confidence continues: this week’s rise was the ninth consecutive increase, which is the longest run of consecutive gains since the index was converted to a weekly series in 2008. While the direction of change remains encouraging, however, it’s also important to remember that the detail of the index paints a picture of current weakness. For example, although the net numbers on current economic conditions improved this week, that still meant that just 10 per cent of households expected ‘good times’ for the Australian economy over the next 12 months while 42 per cent expected ‘bad times’. Likewise, inflation expectations are down at a record low.

    What happened:

    The CoreLogic combined capitals home value index fell by 0.5 per cent in May.

    Australia: CoreLogic Hedonic home value index, combined capitals 050620

    Five of the eight capital city regions recorded a fall in values last month, with declines in Sydney, Melbourne, Brisbane, Perth and Darwin, with Darwin (down 1.6 per cent) posting the largest fall, followed by Melbourne (down 0.9 per cent).

    Why it matters:

    This was the first monthly fall in the combined capitals index since June 2019, ending a ten-month long streak of increases. But while values indicate that COVID-19 is now taking a toll on the housing market, other indicators are a bit more positive. For example, although overall levels of activity remain weak, the CoreLogic estimate of sales activity nevertheless bounced back by 18.5 per cent in May after a (revised) drop of 33 per cent in April, and despite a drop in the latest weekly result, auction clearance rates remain well off their earlier lows.

    Australia: CoreLogic Auction national weekly clearance rates 050620

    What happened:

    The final data on retail trade showed a record 17.7 per cent fall in April. The ABS pointed to unprecedented declines in turnover for cafes, restaurants and takeaway food services (down 35.4 per cent), and clothing, footwear and personal accessory retailing (down 53.6 per cent), along with a large drop in department store turnover (down 14.9 per cent).

    Australia: Retail Trade (nominal) 050620

    Why it matters:

    The preliminary data had already flagged a record fall for April and the final numbers came in very close to the earlier estimates – 17.7 per cent vs 17.9 per cent.

    What I’ve been reading

    The Treasurer’s take on the Q1 GDP results.

    The RBA’s Michele Bullock gave a speech on Panic, Pandemic and Payment Preferences which looked at the implications of COVID-19 for payment systems. The decline of ‘paper’ payment systems (cash, cheques) has been a long-running trend, although the central bank’s 2019 consumer payments survey found that around 25 per cent of consumer payments (about 10 per cent of the value of transactions) were still undertaken using cash. The CVC seems likely to have accelerated this process, as merchants told their customers they preferred contactless card payment, many consumers shifted to online shopping, and banks promoted mobile payments. As a result, ATM withdrawals in April this year were down 30 per cent from the month before and over 40 per cent lower than in April 2019. Bullock also digs into some of the policy implications from this shift, including the need to keep down the costs of electronic payments, the uncertain future of the ATM system, the likely end of the cheque system and the paramount importance of ensuring the resilience of electronic payments systems.

    The RBA chart pack for June is now available, including data up to 28 May.

    And one more RBA-related link. Granted it’s a little dated now, but the Hansard report (pdf) of Governor Lowe’s testimony to the Senate Select Committee on COVID-19 is still worth a read.

    The Grattan Institute looks at why Australia’s response to COVID-19 has been one of the most successful in the world, nominating paying attention to the experts, the closing of our international borders plus mandatory quarantines for international arrivals, the rapid adoption of spatial distancing, and expanded access to telehealth. They also cite some of the failures. Also from Grattan, the dos and don’ts of post-CVC stimulus.

    Peter Drysdale and Chatib Basri argue that Australia should work closely with our regional partners in Asia to help drive the global recovery from the CVC. They draw on this ANU paper (pdf) on an Asian strategy for post-COVID-19 recovery and reconstruction.

    According to the ABS, the number of electric vehicles registered in 2020 almost doubled relative to last year. But that still only left the total at (less than) 0.1 per cent of the Australian fleet.

    The FT pulls together a group of economists and analysts and asks them, are we heading into another Depression?

    Adam Tooze on the (much foretold) death of globalisation.

    Related, Ken Rogoff thinks deglobalisation will have wide-ranging costs.

    Sebastian Mallaby on the Age of Magic Money.

    Some preliminary analysis on the economics of Cyber risk.

    The latest BIS Quarterly Review is now available. This one looks at emerging market corporates' external and foreign currency debt.

    Unherd asks, could COVID-19 topple the skyscrapers? The line ‘People and wind turbines just don’t mix (though, if they get too close, wind turbines could mix people)’ caught my eye.

    And yet more on the future of the office, this time from Vanity Fair.

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