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The wealth of information in the National Accounts provides a detailed picture of the economy in the June quarter, however the focus needs to shift to the ‘next and beyond’ rather than the ‘now’.
While economic activity improved through June and July as restrictions eased across the country, early indicators are showing the impact of renewed restrictions in Victoria, on economic activity in that state as well as through trade and confidence channels to other parts of the economy. ANZ-Roy Morgan consumer confidence is again below 100 in every capital city; bank analysis of account data suggests that spending has stalled; and the ABS payroll data has shown a renewed loss of momentum with all states and territories except Tasmania and the Northern Territory recording a loss of jobs on the payrolls in the two weeks to 8 August. Economic activity in the June quarter was supported by public spending and net exports, although this reflected a collapse in imports. However, the private sector is in deep recession with private domestic demand falling by 10.8 per cent in the quarter, with weakness across consumption, residential construction and business investment.
Both households and businesses are exhibiting cautionary behaviour in the face of extreme uncertainty and recessionary conditions. The household savings rate shot to new record highs, while business credit data shows that there continues to be more business credit repayment than drawdown of new loans. This is a challenge for fiscal policy, as money pumped into the hands of households and businesses ends up in savings or used to pay down debt, rather than spent in the economy. In short, it means Government needs to spend more to stimulate economic activity today.
The trajectory for the household savings rate will be important for the shape of recovery, but is also highly uncertain. Indeed, in the June quarter, income rose but getting out to spend was difficult. We expect income to come under pressure as unemployment rises and income support tapers, while there has mostly been be more opportunities to get out and spend outside of Victoria. As such, the household savings rate is likely to fall in coming quarters, but remain well above pre COVID-19 levels. Improved consumer and business confidence is critical to getting the private sector back on its feet, and that’s no easy task given uncertainty around the virus, the economy, job security, profitability and the pace of policy tapering. How will the Federal Budget on 6 October address this?
While the June quarter is expected to mark the deepest quarterly contraction. While the June quarter is expected to mark the deepest quarterly contraction, September quarter growth will be challenged by renewed restrictions in Victoria and the December quarter will be characterised by the significant tapering of income support. We continue to look for a sawtooth shaped recovery – which I describe as a Nike swoosh with a bumpy bottom – that will require businesses, households and policymakers to remain nimble.
Five key things you must know, five key things you might not know
National accounts data is very rich, we have pulled out our key takeaways and a few facts of interest that you may have missed.
Hours worked
Hours worked is providing a timely proxy for economic activity. Hours worked fell by 9.8 per cent in the quarter, broadly in line with the 7.0 per cent decline in GDP.
The household savings ratio
The household savings ratio rose to 19.8 per cent in the quarter, increasing by 13.8 ppt compared to Q1. This is now the largest quarterly rise on record, surpassing the single quarter rise of 5.6 ppt seen during the GFC.
Household disposable income
Household disposable income rose by 2.2 per cent in the quarter. If early access to superannuation and loan and rent deferrals were included in the national accounts measure of income it would have risen by 8.2 per cent.
Firm income and profits
Firms profits increased by 14.9 per cent as any subsidies not paid to employees were retained.
Dwelling investment
Dwelling investment fell for the 8th consecutive quarter and to its lowest level since 2014, dwelling investment has now fallen for 8 consecutive quarters. Halting this decline and supporting the sector will be an challenge for policy makers.
Research and development
R&D spend has fallen to the lowest level since 2006. Weak R&D investment will have ongoing negative impacts for productivity growth, reducing the economic potential of the country.
Returns to capital and labour
The wages share of income has fallen to the lowest level on record, and below 50 per cent for only the second time. The opposite is true for profits as firms benefited from significant income boosts.
Production
Production fell in almost every industry across the economy. Most notable was a 96.4 per cent quarterly decline in the air & space transport industry.
Household consumption
Household consumption contracted by 12.1 per cent over the quarter, however some sectors emerged as winners with spending on alcoholic beverages up 13.0 per cent over the quarter and furnishings and household equipment up 9.5 per cent.
State Government
State Government budgets are feeling the pain as significant contractions in discretionary consumption, housing turnover and wages flow directly into lower GST, stamp duty and payroll tax revenue.
1
International comparison
Australia has performed relatively well
The length and severity of health restrictions are key determinants of economic growth across the world.
The Australian economy may have contracted by 7 per cent in the June quarter of 2020, but compares favourably to the performance of other advanced economies, especially given the level of stringency observed over the quarter; which rose from an index reading of 19 in the March quarter to an average of 64 in the June quarter. This chart shows the economic performance of a group of select advanced economies, relative to the level of stringency observed across the quarter. According to the line of best fit, a 10 point increase in average stringency leads to a 2.1 percentage point decline in quarterly GDP. Typically, we see that those economies with more severe lockdowns have suffered a greater loss of economic activity.
South Korea is one of just a handful of countries that performed better than Australia in Q2, with an economic contraction of 3.3 per cent, however, they had a less stringent lockdown and saw a bigger contraction in Q1. It’s no surprise that economies with the most severe lockdowns and activity restrictions are suffering the greatest loss to economic activity, but it’s not just average stringency that matters, peak severity is also impactful. On average over the quarter New Zealand was less stringent than Australia, however, the stage 4 restrictions, that were in place for a relatively short period of time, had a significant economic impact. The Reserve Bank of New Zealand (RBNZ) has forecast the economy to contract by 14 per cent in Q2, double Australia’s contraction. This is broadly consistent with the RBNZ’s assessment that stage four restrictions have roughly double the negative impact of stage three.
The fiscal response is also key to economic success in the face of a crisis, and not only did Australia deploy significant stimulus into the economy, but it also flowed through the economy relatively quickly and efficiently.
2
Public sector
The public sector drives growth
Government consumption and investment rose despite a historic fall in government income.
Economic activity continues to be supported by public sector spending. Public final demand rose by 2.5 per cent in the quarter to be 6.3 per cent higher through the year. The gains in public demand were driven by public consumption, which rose by 2.9 per cent. This component of the accounts made the largest contribution to domestic economic growth of any other during the quarter. State and local governments were the main drivers of growth in Government consumption as the primary providers of health goods and services. In the quarter this included additional spending on new medical staff, management of quarantine and contact tracing, personal protective equipment, COVID-19 communication campaigns and the cleaning of publicly owned assets.
Public sector investment made only a small contribution to growth in the quarter, rising by 1.0 per cent to be 1.8 per cent higher through the year and is consistent with investment by the Commonwealth and State Governments plateauing at high levels. Most State governments have signalled they will look to fast track smaller ‘shovel ready’ projects, which are relatively labour intensive and should support spending in the construction sector.
The national accounts provides another way of viewing the unprecedented scale of the State and Federal Governments fiscal response to COVID-19. Government disposable incomes, which includes income (i.e. taxes) less payables (i.e. subsidies paid), and fell by an unprecedented 71.2 per cent in the quarter. This decline was driven by a $12 billion decline in taxes, such as income and company taxes, and a $49.7 billion increase in subsidies such as JobKeeper.
The decline in government incomes, combined with an increase in government consumption (on health and education services) has led to an incredibly stark imbalance between incomes and consumption. This imbalance is likely to persist for some time, as it did following Australia’s last recession, as government revenues remain supressed and expenses and subsidies remain elevated.
3
Consumption
Households are hurting
Incomes rise, consumption falls and cautious consumers boost savings.
The household sector has been at the forefront of disruption, with consumers feeling the effects of border closures, social distancing and ultimately facing significant uncertainty. Household consumption fell by 12.1 per cent, the largest quarterly fall in recorded history, detracting 6.7 percentage points from quarterly GDP growth.
Consumers have pared back on discretionary spending in particular, which contracted by 31.5 per cent in the quarter. Spending on discretionary services - which have been severely impacted by movement restrictions combined with changes to business trading regulations – lead the fall, collapsing by 56 per cent. In particular, spending on transport services fell by 85.9 per cent over the quarter and at hotels, cafes and restaurants, which fell by 56.1 per cent. Not all consumption has fallen, and a side effect of the lock down has been increased spending on food, furnishing and household equipment (home office, entertainment, renovation, sport) and utilities as people spent more time at home.
Falling discretionary consumption is also impacting State budgets through a significant reduction in GST revenues. The contraction in spending occurred despite gross disposable incomes rising by 2.2 per cent, as a 41 per cent increase in social assistance benefits, both in value, i.e. the (temporary) doubling of the ‘JobSeeker’ payment, and an increase in the number of recipients offset a fall in wage and salaries paid.
Falling consumption and rising disposable income resulted in a surge in the household savings rate, which rocketed up from 6.0 per cent in the March quarter to 19.8 per cent. This is in part cautious consumers boosting precautionary savings and restrictions meaning less opportunity to get out and spend. In addition, early access to Superannuation, while not treated as a form income and rather a draw down on saving, and rent and loan deferrals have also added to the amount of cash in people’s pockets. Including these boosts household gross disposable income growth to 8.2 per cent in the quarter and gives an effective savings rate of 24.8 per cent of disposable income – a new record.
4
Dwelling investment
Housing construction continues to weaken
Residential construction is a big employer and a weak spot in the economy.
Dwelling investment continues to detract from growth, and despite showing glimmers of a turning point late last year, dwelling investment has now fallen for 8 consecutive quarters. Weakness in new dwelling investment impacts the construction industry directly, which in the June quarter alone lost 8,600 jobs, but also feeds into the supply of new housing and ultimately impacts housing affordability.
The Governments HomeBuilder Scheme directly supports dwelling investment, but the lags with implementation and planning requirements have delayed the economic impact. While the scheme was announced on the 4th June and expected to support 20,000 new builds and 7,000 substantial renovations, by early August there had reportedly been less than 250 applications. The scheme wont boost GDP until construction begins. Construction on vacant land, whilst only a small component of dwelling investment, is expected to rise off the back of the HomeBuilder Scheme. According to data from REA, enquiries of vacant land are up 215 per cent in in the quarter to June, with an even larger 450 per cent in Western Australia.
Like many parts of the economy, the housing market has not been immune to COVID-19 related disruption. Health restrictions on home auctions during the quarter had a noticeable negative impact on activity which then flows through to state government stamp duty revenues. Ownership transfer costs, which largely represents the turnover of housing and includes the costs associated such as real estate agents, fell by 18.6 per cent in the quarter, to its lowest level since 1987. The States that experienced the largest falls were Western Australia (-25 per cent) and New South Wales (-24 per cent).
5
Private business investment
Investment falls as firms batten down the hatches
Machinery and equipment and intellectual property investment led the declines, engineering activity rose.
A 6.9 per cent fall in non-mining business investment drove the 4.8 per cent decline in overall business investment during the quarter. The decline in investment is consistent with businesses reporting the worst business conditions on record in NAB’s monthly survey during April. Machinery & equipment investment was the biggest detractor from business investment in the quarter, contracting by 6.9 per cent in the June quarter after a 1.9 per cent decline in the March quarter. Investment in new machinery is tied to business conditions and profitability, which tend to take several quarters to recover after a recession. Following the GFC, machinery equipment investment took 3 years to substantively return to levels seen prior to the crisis. Similar lengths of time were seen in the recessions of the early 80s and 90s.
Intellectual property investment was another component of business investment sensitive to changing conditions, falling sharply in the quarter, down 6.0 per cent. Research and development (R&D) expenditure fell by 7.6 per cent in the quarter and follows a 2.5 per cent fall in March. R&D investment is now at its lowest level since 2006. Halting this decline will be important for the economic recovery. A prolonged period of weak R&D investment will have ongoing negative impacts for productivity growth, reducing the economic potential of the country. All things considered, however, the decline in investment during the quarter wasn’t that bad relative to the overall decline in GDP. This is because less responsive aspects of business investment such as engineering activity and new building investment maintained high levels of activity, and the mining sector continued to invest.
Engineering construction rose by 1.9 per cent in the quarter, supported by a lift in spending on mining projects, roads and electricity generation and distribution. Indeed, mining investment rose by 1.3 per cent in the quarter, the third consecutive quarter of growth, to be 7.9 per cent higher through the year. A strong pipeline of work yet to be done in the non-residential construction sector supported a high level of spending on new buildings, which fell by a modest 2.3 per cent in the quarter, and remains only 5.5 per cent below a record high for the sector seen in the September quarter 2019.
6
Net-exports
Collapsing imports sees net exports add to GDP
Net exports again contributed to GDP growth as a decline in imports outstripped the decline in exports.
Net exports added 1.0 percentage point to GDP in the June quarter. But this is not a good news story as it reflects the fact that imports declined by more than exports, resulting in a record trade surplus for Australia. Imports fell across almost all categories, and to the lowest level in nearly a decade. The full effect of the international border closures was revealed this quarter as service imports fell by 12.9 per cent. Travel services – largely tourism - fell by 99 per cent in the quarter, following a 24 per cent decline in the March quarter.
Meanwhile weak domestic conditions led to a substantial decline in goods imports. Consumption goods imports fell by 6.9 per cent and machinery and equipment imports fell by 1.8 per cent (following a 7.0 per cent decline in the March quarter). The current decline in consumption goods imports is comparable to the GFC, despite there being a larger decline in household consumption, this is because health restrictions impacted services more than goods in this downturn.
Exports fell by 6.7 per cent in the quarter, as exports of rural goods (down 6 per cent), non-rural goods (down 3 per cent) and non-monetary gold (down 10 per cent) all fell in the quarter. Travel service exports (tourism and education) also fell in the quarter, down 25 per cent, but held up well compared to imports, as many international students made it into the country prior to the border closures.
7
Industry focus
COVID-19 has a broad-based impact across industry
Accommodation and food services led the declines in a quarter where almost every industry suffered.
COVID-19 and the associated health restrictions have had a broad-based impact on production across the economy. Activity fell in 15 out of 19 industries. The industries most directly impacted by social distancing restrictions experienced the largest declines. Accommodation & food and arts & recreation services experienced the largest declines of 39.0 per cent and 22.6 per cent respectively, as venue closures and limits on capacity negatively impacted food, sport, gambling and recreational activities, while travel bans impacted accommodation. Transport postal and warehousing, Administrative and support services, Rental hiring and real estate services, Construction and Other services also experienced double digit declines.
Despite increased spending by State governments on health, the health care and social assistance industry also experienced a decline of 7.9 per cent in the quarter. The fall was driven by a decline in both private and public health services, with reduced demand for medical aids, hospital services and allied health services. Four industries experienced growth in the quarter, including public administration, education & training, mining and finance and insurance services. The growth in the finance industry reflects a significant rise in savings by businesses and households.
8
Other
Other facts and figures for Q2
Unprecedented level of disruption.
Over the quarter we saw a deterioration in the labour market with unemployment and underemployment rising, and participation falling. The Federal Governments ‘JobKeeper’ program is keeping many Australian workers tied to employers and counted as employed, despite working zero hours. Phasing out of the program presents a real risk to the labour market, and in the latest forecasts from the RBA, unemployment is expected to peak at 10 per cent in the December quarter of this year. Inflation fell by 1.9 per cent over the June quarter, with prices 0.3 per cent lower over the year. A decline in annual inflation is rare - there have only been three quarters since 1948 when overall consumer prices have fallen. In the June quarter the decline was in part driven by a number of one off impacts such as free child care as well as the sharp fall in petrol prices. Looking at underlying inflation, which strips out these one off impacts, prices rose by a record low of just 1.2 per cent over the year.
In the June quarter, annual wages growth (as measured by the Wage Price Index) slowed to 1.8 per cent, the slowest rate of growth in the series 22 year history. In Victoria wages actually fell by 0.1 per cent in the quarter, the first quarterly decline every recorded. Soft wage growth continues to be a headwind for households, and with such significant spare capacity in the labour market it is likely to stay that way for some time.Australia’s current account surplus surged by $8.7 bn to a record high of $17.7 bn in the June quarter, driven by a dramatic contraction in imports. Exports fell in all categories, despite higher iron ore exports. The Australian Dollar has seen an appreciation, and while a lower currency would be a support for economic recovery the Australian dollar is currently not above estimates of 'fair value’.
Summary
While economic activity improved through June and July as restrictions eased across the country, early indicators are showing the impact of renewed restrictions in Victoria, on economic activity in that state as well as through trade and confidence channels to other parts of the economy.