Quarterly Economic Update, Q3 2021: Resilience in the face of delta disruption

From the Chief Economist

Yet again, the Australian economy has surprised to the upside. Households are sitting on savings, businesses have shown resilience and the public sector has done the heavy lifting, cushioning the delta disruption and underwriting a smaller than expected contraction in today’s national accounts.

This strength shows in the fact that we will only need two per cent growth in the December quarter to get the economy back to pre-delta levels – which is achievable even in the face of Omicron.

There was never going to be cause for great surprises in today’s data. Governments quickly implemented the 2020 support playbook, spending to support economic activity and the higher frequency indicators suggest that the economy stormed back to life as restrictions eased.

This should provide confidence in Australia’s economic recovery profile – households and businesses are cashed up and ready to spend, while the government support has again done its job.

Unsurprisingly the delta divide stands out, but Victoria has showed much greater resilience than New South Wales. Despite being locked down for 80 per cent of the quarter, the state’s final demand recovered to just below pre-pandemic levels. New South Wales was locked down for the entire quarter and its economy is still 3.4 per cent smaller than pre-pandemic. But correlation isn’t causation, and the duration of lockdowns can’t entirely explain for the differing outcomes. In fact, both private consumption and investment were stronger in Victoria than New South Wales.

The fall in consumption in New South Wales in the September quarter was almost double that of Victoria, while private investment rose by 6 per cent in Victoria compared to a 7 per cent decline in New South Wales. The rise in Victoria’s non-dwelling construction was supported by investment in renewable energy projects while the rise in spending on machinery and equipment largely reflected spending on trucks and agricultural equipment.

After a shaky start, more than 50 per cent of Australia’s entire vaccination program was administered during the September quarter. This vaccine roll-out delivered a double jab to the economy – providing confidence in the path out of lockdown but also driving a 3.6 per cent increase in public consumption. The role of public spending in supporting economic activity can be seen clearly throughout the National Accounts. Payment of wages and salaries by the public sector and policy support worked together to underpin a rise in household income and business profits.

The external sector also provided a boost to the economy with strength in commodity and rural exports as well as a collapse in consumer imports.

Australian households followed a familiar script to previous lockdowns. With income boosted by Government support and the inability to get out and spend on services, Australians spent on home renovations and added to the savings pot, but left spending on goods behind this time. Household disposable income rose by 4.6 per cent, driven by a 2.6 per cent contribution from government payments and the savings rate almost doubled to 19.8 per cent, close to the peak seen in 2020.  

Similarly, while underlying private investment fell in the September quarter, profits rose which sets the scene for upgrade capital investment plans to be delivered over the remainder of the financial year.

Overall, the GDP data should provide confidence that Australia’s economic recovery can be sustained, even if further health measures are required to contain Omicron.