Summary

  • Australian economy shrunk by 7% in the June quarter, officially getting pushed into its first recession in nearly 3 decades.
  • The unemployment rate fell from 7.5% in July to 6.8% in August, with a rise of 1.6% in total hours worked in August, as per ABS.
  • CBA Economists have upgraded their forecasts on Australian GDP and now expect a 2% rise in it during the current quarter.
  • The improved forecasts came after CBA spending data showed increased household spending and a better than expected jobs report in August.
  • High unemployment, tense relations with China and gradual cuts in government subsidies are likely to act as barriers for a few years in the economic recovery of Australia.

The Australian economy has been pushed into its first recession in the last 30 years due to the economic fallout from coronavirus. The country's GDP plunged 7% in April to June quarter compared to previous month, which marked the second consecutive quarter of contraction after a 0.3% fall in the first quarter.

The drop in the economic activity was attributed to the pandemic and shutdown measures undertaken to contain the spread of the disease.

ALSO WATCH: Australia’s June Quarter GDP Slides 7%; Is Nation Entering into Recession?

Though Australia performed much better than other nations in controlling the virus and the subsequent economic contraction, it still suffered a severe drop in the economic activity.

However, many economists are forecasting that the Australian economy will grow with better GDP figures in the September quarter, even after a second wave virus-induced shutdown in the state of Victoria.

Even the Federal government is predicting a bounce back to growth in the September quarter as most of the hard lockdown days are over and life is gradually returning back to normal.

The joblessness rate decreased to 6.8% during August

As per the latest ABS data, the unemployment rate in the country declined from 7.5% in July to 6.8% in August in seasonally adjusted terms, a fall of 0.7 pts.

Some of the other highlights of the data for August 2020 includes the following:

  • Employment rose by 111,000 people to 12,583,400 people in August but over the year to August 2020 fell by 2.6%.
  • Monthly hours worked in all jobs increased by 1.6 million hours (0.1%) to 1,683 million hours.
  • The participation rate rose by 0.1 pts to 64.8%, while the underemployment rate stayed at 11.2%.

The unemployment numbers came in as a surprise because economists, Treasury and even the Reserve Bank of Australia were expecting a higher unemployment rate. The lower unemployment rate came in even after stage 3 restrictions in regional Victoria and lockdown imposed in Melbourne.

Though there remains uncertainty on whether the unemployment rate has already reached its peak, or it will rise further, as forecasted by Treasury earlier.

CBA data showed a rise in in-store expenditure

CBA's credit and debit card spending data showed a 17% rise in spending on goods with an increase of 28% in spending on household furnishings, and equipment for the week ending 11 September compared to the same week last year.

ALSO READ: How increased spending support and cash rate at 0.25% would help the Australian economy

CBA results showed a 5% bounce back in total annual spending growth. The bank noted that expenditure on eating drinking out has flattened during the week, but in-store spending was rising in Australia and had passed the low witnessed in Victoria.

CBA upgrades its GDP outlook

Commonwealth Bank economists have raised their economic growth predictions on improved jobs and spending numbers in recent months. GDP is now predicted to increase by 2% for Q3, changing their annual forecast to a 3.3% contraction from the earlier estimate of 4.3% plunge for 2020.

Gareth Aird, CBA’s senior economist, stated that the improved predictions were based on increased household expenditure, reflected through CBA’s internal credit and debit card data, as well as better than anticipated jobs report for August.

CBA expects GDP growth to be at 2.5% next year, and the unemployment rate of 6.5% by the close of next year.

DO WATCH: 932,000 Jobs Lost Between March and June Quarters | ASX Market Update

He stated that spending outside Victoria has been surprising and a reasonable bounce in the hours worked was noticed since the low point in May. He expects economic output to continue to grow in Q4, marking a 1.8% rise in GDP, mainly backed by Victoria's reopening.

However, the economy is not anticipated to return to the levels of economic output before coronavirus until Q1 of 2022, as per Mr Aird.

A stimulating budget expected

Josh Frydenberg, Treasurer of Australia is due to deliver his recession budget in 2 weeks on 6 October. He has highlighted personal income tax cuts, new infrastructure expenditure and substantial business investment incentives on his agenda. He has signalled a private sector-led recovery with a shift to job creation from income support.

DO READ: Is Australia ready for the JobSeeker cord being pulled?

Nevertheless, the government's JobKeeper and JobSeeker payments are set to be cut back by $300 a fortnight or about 20%. The cuts will have a significant impact on the spending ability of millions of Australians who are relying on these packages for their survival.

Tough road ahead

Treasurer Josh Frydenberg has described the road to economic recovery ahead as bumpy, long, and hard. Grattan Institute's modelling suggests that about 740,000 Australians will be pushed into poverty after the JobKeeper and JobSeeker cuts.

Interesting read: RBA charts out Economic Recovery Forecasts apparently with 'No Vaccine Roll-out' assumption

The Institute also noted that more government stimulus would be required to lower the unemployment rate and stop Australians from falling below the poverty line.

DO READ: Morrison government revamped rules lets one take a dip into JobKeeper and JobSeeker dole outs

As per the RBA and many economists, the Australian economy will take up to 2022 to return to pre-coronavirus levels.

Economists at Grattan Institute estimate that an extra stimulus of about $100-$120 million will be required to cut the unemployment rate by 2 percentage points and bring it to around 5% from 7%.

GOOD READ: Impact of Coronavirus on Australian Economy and Way Forward

Further, Australia relies heavily on China for its exports of coal, iron, and many other natural resources. The trade relationship between both the countries has been deteriorating after Australia called in for a probe into origins of coronavirus in Wuhan. The probe sparked a Chinese backlash with China imposing tariffs on the imports of Australian wine, beef, and barley.

Did You Read? Are We Prepared for a Trade War with China?

Hence, Australia needs to balance both economic and political stance to get its economy back on track.

 

There is no investor left unperturbed with the ongoing trade conflicts between US-China and the devastating bushfire in Australia.

Are you wondering if the year 2020 might not have taken the right start? Dividend stocks could be the answer to that question.

As interest rates in Australia are already at record low levels, find out which dividend stocks are viewed as the most attractive investment opportunity in the current scenario in our report  Top Dividend Stocks to Consider in 2020

CLICK HERE FOR YOUR FREE REPORT!

 


Disclaimer
This website is a service of Kalkine Media Pty. Ltd. A.C.N. 629 651 672. The website has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine Media does not in any way endorse or recommend individuals, products or services that may be discussed on this site. Our publications are NOT a solicitation or recommendation to buy, sell or hold. We are neither licensed nor qualified to provide investment advice.

 

   
We use cookies to ensure that we give you the best experience on our website. If you continue to use this site we will assume that you are happy with it. OK