Australian economy beats COVID blues to bounce back

Australia’s economy expanded at a faster-than-expected pace in the final quarter of 2020 and indicators suggest enormous monetary and fiscal stimulus are continuing to support growth this year.

The economy accelerated 3.1 percent in the three months ended December, data from the Australian Bureau of Statistics (ABS) showed on Wednesday, faster than expectations of 2.5 percent. Growth in the third quarter, meanwhile, was revised upwards to 3.4 percent.

Despite the best ever back-to-back quarters of growth, annual output still shrank 1.1 percent, underscoring the havoc wrought by the coronavirus pandemic and suggesting policy support will still be needed for the 2 trillion Australian dollar ($1.57 trillion) economy.

“The ‘V-shaped’ nature of the recovery is everywhere to see – economic growth, the job market, retail spending and the housing market,” said Craig James, Sydney-based chief economist at CommSec. James expects the economy to rebound 4.2 percent in 2021.

Household spending surged 4.3 percent from the previous quarter, adding 2.3 percentage points to GDP; government spending increased 0.8 percent quarter-on-quarter, contributing 0.2 percentage point, government data showed.

Data on credit and debit-card spending by major banks as well as official figures on retail sales, employment and building activity also pointed to a strong start to 2021.

Marcel Thieliant, economist at Capital Economics, expects GDP growth of 4.5 percent in 2021, “which implies that allowing for the slump in net migration due to the closure of the border, the economy will suffer no permanent drop in output as a result of the pandemic.”

“Job is not done”

Australia’s economy has performed better than its peers because of the government’s swift moves to stamp out the virus and a series of fiscal and monetary stimulus measures.

Its economic output declined 2.5 percent in 2020, far smaller than a 10-percent drop in the United Kingdom, 9 percent in Italy, 5 percent in Canada and more than 3 percent in the United States.

“Our economic recovery plan is working, and today’s national accounts is a testament to that fact,” Treasurer Josh Frydenberg said in a news conference.

But he cautioned that Australia was not yet out of the woods.

“The job is not done,” he added. “There are challenges ahead. But you wouldn’t want to be in any other country but Australia as we begin 2021.”

To help blunt the economic shock from pandemic-driven shutdowns, the Reserve Bank of Australia (RBA) slashed interest rates three times last year to a record-low 0.1 percent and launched an unprecedented quantitative easing programme. The government also announced a wage subsidy scheme to keep people in jobs while banks deferred payments on home loans and cut borrowing rates to help boost credit growth.

On Tuesday, the RBA re-committed to keep three-year yields at 0.1 percent until its employment and inflation objectives are met, which policymakers do not expect until 2024 at the earliest.

Indeed, Wednesday’s data showed there was barely any domestic-driven inflation in the economy with the biggest price rises coming from commodity exports.

The RBA has repeatedly said the unemployment rate must fall to about 4 percent from its current level above 6 percent to help drive wages growth above 3 percent and for inflation to go back into its 2-3 percent target band.

“Stimulus and support measures are still very much required,” CommSec’s James said. “Spare capacity will remain in the job market for a few more years, keeping the cash rate anchored at 0.1 percent.”