3 June 2020

National Accounts - March Quarter 2020

Less than 100 days ago our nation was on the edge of an economic cliff.

The number of coronavirus cases was increasing by 20 per cent per day. Treasury were contemplating a collapse in GDP of more than 20 per cent in the June Quarter.

It was an economist’s version of Armageddon.

In response to this one in 100 year global event we put in place a series of health measures that have hit the economy hard.

These were tough decisions but these were decisions we had to take.

Saving lives was our priority and that has been the result.

While tragically 102 people have died in Australia as a result of the coronavirus it stands in stark contrast to the United States, where more than 100,000 people have lost their lives, and the United Kingdom, where around 40,000 people have lost their lives.

To illustrate just how bad we thought it could get, we purchased 5,500 ventilators but thankfully today there is just one coronavirus patient in Australia on a ventilator, demonstrating the real progress we have made on the health front.

Notwithstanding the success of the health measures we have put in place they have come at a significant economic cost and this is reflected in today’s National Accounts.

It is important to remember that it was quite early on in the March quarter that the health restrictions were starting to be implemented.

Australia had its first confirmed coronavirus case confirmed on January 25th and a week later on the 1st of February Australia became one of the first countries to put in place travel restrictions with China.

These restrictions soon extended to Iran, South Korea and Italy and then to all non-residents on 20 March.

Social distancing rules were also progressively implemented over the Quarter.

On the 15 March outdoor gatherings were limited to 500, on 18 March indoor gatherings were limited to 100, on 20 March the four square meter rule came into place and on 24 March overseas travel was banned and limits placed on the size of gatherings at weddings and funerals.

It was in this Quarter, the March Quarter, that consumer and business confidence hit record lows, the ASX 200 lost a third of its value and on the 16th March saw its biggest daily fall on record of 9.7 per cent.

When combined with the ongoing drought, which saw farm GDP fall by 2.4 per cent in the Quarter and the devastating impact of the fires raging across many states, one looks back on the March Quarter and there wasn’t a lot of good news.

Seen in this context the fact that the Australian economy only contracted by 0.3 per cent shows its remarkable resilience.

Indeed, Australia’s performance in the March Quarter compares very well to that seen in other nations with negative growth in China of 9.8 per cent, France 5.3 per cent, Germany 2.2 per cent, United Kingdom 2.0 per cent and the United States 1.3 per cent.

With the 40 million jobless claims in America in the last ten weeks the economic situation in that country and across the globe is quite severe indeed.

In Australia’s remarkable story of almost 29 consecutive years of economic growth this is only the fourth negative quarter in that time.

While growth was up 1.4 per cent through the year, the March quarter contracted by 0.3 per cent broadly in line with market expectations.

While Government spending and net exports contributed to growth in the Quarter it was more than offset by the contraction caused by falls in consumption, investment and inventories.

While fear of a lockdown saw panic buying of food and household items, total consumption still fell by 1.1 per cent in the quarter. This is the largest quarterly decline in consumption in 34 years with 10 of the 17 consumption categories falling.

Spending on transport services and hotels, cafes and restaurants experienced their largest falls on record.

In the words of the ABS the sharp reduction in spending on services was due to “the introduction of social distancing restrictions and travel bans.”

The household saving ratio increased to 5.5 per cent in the quarter as household income increased but household spending fell.

The health related restrictions also significantly affected our tourism and international education industries.

Net exports contributed 0.5 percentage points to growth in the March quarter.

Services trade was heavily impacted by travel bans on both inbound and outbound travel. After eight consecutive quarters of growth, services exports fell by 12.8 per cent while services imports also fell sharply, by 13.6 per cent.

Australia recorded its fourth consecutive current account surplus of $8.4 billion in the March quarter, the longest consecutive period of current account surpluses since the 1970s. Exports continue to be supported by Free Trade Agreements which now cover around 70 per cent of our two‑way trading relationships compared to just 26 per cent when we came to Government.

New business investment fell by 0.8 per cent in the quarter with a decline in new machinery and equipment and new building more than offsetting an increase in new engineering construction.

Mining investment rose by 3.6 per cent in the quarter, the second consecutive quarterly rise with only a few mining projects experiencing delayed final investment decisions as a result of uncertainty caused by the coronavirus outbreak.

The ABS CAPEX survey released last week showed that despite investment intentions in the mining sector being downgraded, they remain positive for 2020-21.

Inventories detracted 0.2 percentage points from GDP growth in the quarter. Inventories in retail, wholesale and manufacturing fell as households bought goods at a faster rate than they could be manufactured. These falls were partially offset by a rise in Public authorities’ inventories, including health inventories due to a build-up in the National Medical Stockpile.

The economy continues to be supported by new public final demand, reflecting spending across all levels of Government, which rose by 1.4 per cent in the quarter to be 5.3 per cent higher through the year.

Turning to the income side, compensation of employees (COE), which measures the national wage and salary bill, was up 0.5 per cent in the March quarter to be 4.2 per cent higher through the year.

The increase in COE was driven by an increase in employment with 39,000 jobs created over the quarter.

With restrictions easing, we are seeing some encouraging signs across the economy. 

As the RBA Governor said last week in evidence to the Senate Committee on COVID-19 “with the national health outcomes better than earlier feared, it’s entirely possible that the economic downturn will not be as severe as earlier thought.”

Equity, debt and credit markets have stabilised with the ASX recovering more than 60 per cent of its fall from its high in February to its low in March.

The Australian dollar has now more than fully recovered the 11 cent fall that occurred in less than two weeks from above US 66 cents on 9 March to a low of US 55 cents on 19 March, levels previously seen in October 2002.

Consumer confidence has increased for nine consecutive weeks since the announcement of JobKeeper and has recovered around 95 per cent of the fall from mid-March.

Business confidence rose in April to reverse around one-third of its record fall in March. However, it remains well below its 10-year average.

With restrictions starting to lift in accordance with the decisions on National Cabinet it will be paramount to build confidence and to keep the momentum to consolidate these gains.

Today’s National Accounts show once again that in the face of a one in 100 year global pandemic the Australian economy has been remarkably resilient.

We entered this economic crises and this health crisis from a position of economic strength.

Growth was rising, the unemployment rate had fallen to 5.1 per cent in February, 1.5 million new jobs had been created and the Budget was back in balance for the first time in eleven years.

This economic strength gave us the fiscal firepower to respond as we have done with around $260 billion in economic support, or the equivalent of 13.3 per cent of GDP.

We are not through this crisis. There will be difficult days ahead. But our nation, working together across geographical and political lines, has made great progress.

Through flood, fire, drought and now the coronavirus pandemic, Australians have shown a unity and purpose which should make all Australians proud and confident about their future.