Economy stuck in the slow-lane with coronavirus impact yet to come: Andrew Hanlan

Economy stuck in the slow-lane with coronavirus impact yet to come: Andrew Hanlan
Staff ReporterDecember 7, 2020


The Australian National Accounts, to be released on Wednesday March 4, will provide an estimate of economic activity for the December quarter, including any boost to date from recent policy stimulus. This is ahead of the substantial disruptions from the coronavirus outbreak.

The economy appears to be stuck in the slow-lane after decelerating sharply through the second half of 2018, when the home building cycle swung from boom-to-bust.Moreover, growth is lopsided, centred on public demand and exports, while private demand is weak.

Powerful headwinds persist: construction activity is contracting; weak wages growth and a lack of confidence are impacting consumers; and the global backdrop is challenging.

Tail winds are from: brisk government spending (in the form of public demand), with a focus on health and investment; and the export uptrend, supported by the lower dollar.

Policy stimulus has been deployed - with 3 RBA rate cuts and modest tax rebates. Housing is responding, with prices rebounding sharply. But the flow-on effects to the real economy are yet to emerge. The tax rebates seem to have been largely saved.

The severe bushfires this summer have disrupted activity, across construction activity, consumer spending and possibly business investment. The impact in Q4 may be about -0.1ppt.

In Q3, real GDP growth was 0.4%qtr, 1.7%yr. The arithmetic being: domestic demand +0.2%; net exports +0.2ppts; inventories, +0.1ppt; and the statistical discrepancy, -0.1ppt.
For Q4, real GDP growth is a forecast 0.5%qtr, 2.1%yr, with risks tilted a little to the downside. The arithmetic: domestic demand 0.1%; net exports +0.2ppts and inventories +0.1ppt, as well as the statistical discrepancy, +0.05ppt.

Private demand, on our figuring, contracted further, -0.1%qtr, -0.5%yr. Home building is contracting, so too business investment and consumer spending is soft. The last time private demand expanded was 2018 Q2.

On the consumer, accounting for 57% of domestic demand, the national accounts provide us with a detailed update on spending, saving and incomes. Notable is the softness in incomes (wages and non-labour income). Households are income constrained and the savings rate has declined in recent years, to a low of 2.7% in June 2019, then spiking to 4.8% in September 2019 as tax rebates were saved.

The labour market was on the softer side in the December quarter. Job numbers increased by 0.3%qtr, 2.0%yr and hours worked by 0.3%qtr, 1.8%yr. Productivity remains weak, exacerbated by the severe drought.

National income has been running at a 5% plus annual pace of late, supported by higher commodity prices. That changed in Q4, with commodity prices moving into reverse and the terms of trade down an estimated 4.7%. Nominal GDP growth is a forecast -0.3%qtr, 4%yr.

For 2020, our assessment is that output growth will remain stuck below trend, at around 2%. The coronavirus will have a material impact, particularly in the March quarter, when overall activity may stall, with a sizeable hit to trade, particularly tourism and education.

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ANDREW HANLAN is a senior economist for Westpac



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