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Economy on Track as Activity Surges in Q1

In one line: Confirmation that the strong economic recovery continued early in 2021 with the transition to a private sector-led expansion well underway.

Three Key Points:

  • Business and consumer spending, and strong international trade outcomes are driving economic growth in early 2021.
  • The household saving rate remains stubbornly high but that could be good for future consumption.
  • Overall household income growth was strong in the quarter despite the withdrawal of government support – employment growth is key to maintaining a solid economic trajectory for the rest of the year.

Chart and Analysis

The chart below tells the overall GDP story for Australia. We have recovered the pandemic losses of 2020 and are now back to new record high levels of GDP in the quarter at just above $500bn (blue line). What we need to do is get the economy back to ‘where it would have been’, that is, the potential level of GDP (red dotted line). I am forecasting further solid growth over the next year to get us back to potential by early 2022 (green line).

GDP Snapshot _WH June 2021

This is exactly what the government and the RBA want and I think they will get it. The sting in the tail of all of this is that once you are back to potential, if you keep growing strongly, you risk stoking inflation pressures. We will see.

Overview

GDP grew by 1.8% in Q1 following a 3.2% rise in Q4.

GDP is up 1.1% over the year. From the pandemic low in Q2 last year, GDP has grown by 8.7% in 9 months. We are now above pre-COVID levels of economic activity and showing all the signs of a private sector-led economic expansion.

A robust but still cautious consumer continues to save. Consumption rose at a healthy 1.2% in the quarter although I suspect economists were looking for a bigger rise. Spending grew at a slower pace than expected because the household saving rate did not fall by as much as many had anticipated. The saving rate did fall in the March quarter, from 12.2% to 11.6%, but it remains at the highest level in 35 years reflecting both a cautious consumer and some restrictions on spending, most importantly, the inability to travel overseas.

Big trade surpluses add to growth. The big upside surprise in these numbers was Australia’s strong international trading results revealed earlier this week in the Balance of Payments numbers. Exports are strong while imports are soft. The massive trade surplus is providing a big boost to measured GDP and highlights how important the international economy has been to our recovery from COVID-19 (despite the international border being closed).

The transition to a private sector-led economic expansion is well underway. The public sector played a central role in maintaining economic activity through the worst of the pandemic last year. This laid the foundation for a strong recovery which is now being driven by private sector spending from both consumers and businesses.

Over the year to March 2021 public demand grew by 4.9% while private demand grew by just 0.9%. However, in the last six months, we have seen private spending jump 6.6% compared to 1.3% for the public sector.

Importantly, we have seen a big fall in government subsidies while the tax take is growing again. In the quarter ‘Government Subsidies less Taxes and Duties’ fell by more than 60%. With employment and household income strong and business investment increasing over the quarter, this is a sure sign that the wind back of emergency policies is happening in an orderly way with very little evidence of a disruption to the overall economic recovery.

On an industry basis, the star performer of the past year is the agricultural sector. Agriculture, forestry and fishing as an industry increased its output by 24.2% over the year to March. This mainly reflects the strong bounce from drought and strong demand conditions.

The other high-growth industries of the last year are wholesale trade (+6%), retail trade (+3%) and health and social services (+4%). The weakest sectors are administration and support services (-10%) and transport (-7.8%).

The hospitality industry was broadly flat over the year, which is a pretty good result given COVID disruptions to international and domestic tourism and, regular population wide lockdowns at the state level.

The various States and Territories put in an uneven performance. Victoria and Western Australia led the way with state final demand jumping 2.3% and 3% respectively. This compares to national domestic demand growth of 1.6% in the March quarter. NSW, SA and Tasmania grew in line with the national economy while Queensland and the ACT lagged the national recovery, where state demand rose by 0.5% in the quarter. The NT had a shocker, with state final demand falling 1.9% in the quarter. They will bounce back, I am sure!

Investment was strong across the economy with all the major components of investment rising except for non-residential building. Housing, plant and equipment, agricultural and public sector investment all rose at a solid pace in the first quarter.

The compensation of employees grew at a very healthy rate in Q1, up 1.5% mainly on the back of growing employment and more hours being worked. This was led by the private sector which increased by 2.4%. As we know, wages rose by a reasonable 0.6% in Q1 but it was the volume of work done by Australians that drove higher compensation over the three months.

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