Weekly Roundup on Economic Front: Trends Shaping Future Developments

Summary

• Australian economy shrank for the first time in almost three decades by 0.3%, with Josh Frydenberg confirming that the country is in an economic recession.
• Coronavirus has disrupted the economy’s trade balance, retail sales and the housing market. However, they are anticipated to show some positive results as economy reopens.
• Australia may weather the storm strongly while it is eyeing the second wave of infection, provided there is a bounce back in consumer confidence, business operations and travel space as economy gradually re-opens.

While Australian economy has been able to flatten the infection curve relatively well compared to other advanced economies, massive economic stimulus by the Federal Government and central bank to limit the spread of coronavirus has placed the Australian economy on the verge of the first technical recession in 3 decades.

Let's have a look at the economic developments in the past week-

GDP fell by 0.3% in the March quarter

As per the data released by ABS (Australian Bureau of Statistics), the Australian GDP fell 0.3% in seasonally adjusted terms in the March quarter 2020 while growth slowed to 1.4% through the year. The opening quarter of 2020 was a turbulent one that witnessed bushfires; coronavirus outbreak and its related restrictions such as travel bans and social distancing; and other natural disasters. The government response to the events was a massive economic stimulus and support packages.

Market experts predict that the GDP might land in the negative territory in the June quarter as the full impact of lockdowns is unearthed. However, Treasurer Josh Frydenberg stated that economic contraction of Australia is not as bad as compared to its global counterparts.

As per IMF, the Australian economy is predicted to drop by 6.7% in 2020, one of the worst-hit in Asia. It stated that since unemployment is rising in many nations due to business shutdowns amid coronavirus induced lockdown, countries will witness the most severe economic contraction since the 1930s Great Depression. While the global economy is predicted to fall by 3% in 2020, it is projected to grow by 5.8% in 2021 as the activities are normalised, guided by policy support and possible fading of the pandemic in the second half of 2020 with containment efforts been relaxed.

Dwelling approvals stayed elevated in April

In seasonally adjusted terms, the number of dwellings approved fell by 1.8% in April driven by a fall in private sector dwellings excluding houses but a rise in private sector houses. Though the figures look positive, they are not expected to last.

However, market experts believe that the data doesn't reflect the real picture as the negative effect of coronavirus shutdowns on approvals is yet to show in the coming months. There is a lag in processing approvals, i.e. submitting an application for building approval and obtaining authorisation.

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While residential construction is projected to fall in 2020, some softening can be expected due to government programs to support new construction.

Recently, the Morrison government decided to give out cash handouts for renovations and other policy support to boost construction. Due to this, the investment bank UBS upgraded its outlook for house prices to fall between 5-10% in 2020 instead of the previous prediction of house prices falling by at least 10%.

April Trade surplus marked a dip

Australia recorded a trade surplus of $8,800 million in April 2020 in seasonally adjusted terms falling by $1,646 million from March 2020 as both imports and exports declined sharply because tourism came to a halt.

Trade is dependent majorly on global economies resuming operations, especially the ones which are Australia’s key trading partners such as China, Japan, and South Korea.

Retail turnover falls in April

Social distancing restrictions imposed to fight coronavirus led to the closure of many retail outlets bringing down the Australian retail turnover to 17.7% in seasonally adjusted terms (as per ABS). A record drop was observed in cafes, restaurant, and takeaway food services along with clothing, footwear and personal accessory. However, closure in physical stores led to an upsurge in the online retail business that helped to add 11.1% to the total retail market in April 2020.

Though food retailing became the primary driver for the downside by recording a fall of 17.4% following a massive demand in March, spending on food retail was 5.1% above from April 2019, showing extra meals consumption at home in April 2020.

With economy reopening, easing restrictions, and policy support by central and state governments- customers are feeling confident to step out and increase the physical visit to the retail stores. Hence, sales are expected to rise, but weak incomes to persist due to persistent headwinds.

Independently, ANZ figures talk about positive retail spending, up by 25%, during a week ending on May 27, 2020, and has asserted that debit and credit card spending was up 3.3% as compared to a year ago.

Business indicators and government finances for March quarter

• While the seasonally adjusted (SA) estimate for inventories fell 1.2%, wages and salaries remained relatively unchanged
• Company gross operating profits rose 1.1% in the March quarter, not reflecting the impact of social distancing restrictions since they were implemented in late March.
• Manufacturing sales and wholesale sales of goods and services rose 2.2% and 1.6% respectively this quarter in SA terms.

Overall spending by the government increased by 1.2% in the March quarter. Government final consumption expenditure rose by 1.8% and is expected to add 0.3 percentage points to growth in the March quarter- volume measure of GDP 2020. Public gross fixed capital formation fell by $184 million, which is not expected to weaken substantially from growth in the March quarter GDP.

The end of policy support by the government could give a massive hit to the economy. A combination of fiscal and monetary stimulus measures by government and RBA as well as consumer sentiment amid easing of restrictions can help the economy sail through this difficult period.