Outlook: Benjamin Ong

Australia is weathering “the recession we didn’t have to have” much better than its less fortunate peers

It was good, oh so good, while it lasted. But as the saying goes, “nothing lasts forever”. It had been more than a generation since Australia experienced “the recession we had to have” back in 1990-91.

Australia deflected, survived and came out on top of the critical challenges that plagued world economies and financial and capital markets over the years since then.

The Australian economy withstood the US savings and loan crisis of the early 1990s, the Asian currency crisis/Russian debt default/Long-Term Capital Management collapse in 1997-98, the September 11 terrorist attacks on the US in 2001 (and the subsequent recession there) and the GFC of 2008, which subsequently sent many world economies into a recession.

But now it’s all over. A teeny-weeny microscopic organism has ended the Australian economy’s 29-year recession-free run.

Not that we need to be informed – we were already feeling it in our hip pockets – but the Australian Bureau of Statistics’ latest national accounts report made it official … we are in recession!

Australian economic growth contracted 7% in the June quarter – the biggest fall on record since 1959 and worse than market expectations for a 5%-6% fall – that followed a 0.3% decline in the March 2020 quarter, satisfying the technical definition of a recession.

The details of the national accounts show exactly what one expects of an economy in lockdown.

Household consumption, which accounts for around 60% of national output, dropped by 12.1% in the June quarter and subtracted 6.7% from overall growth. This is despite the 2.2% increase in household income during the period, “reflecting a rise in nonlabour income (consisting of investment income, earnings from unincorporated businesses and social assistance benefits)”.

The Reserve Bank and the federal government’s stimulus measures may have put money in our hands, but with social and physical distancing restrictions and many businesses shut down, we have nowhere to spend it.

Then again, even without the restrictions and shutdowns, the uncertainty with regards to the extent and duration of the pandemic and its negative consequence on the economy, particularly the outlook for employment, would still prompt households to reduce spending and increase savings. This is underscored by the surge in the household savings ratio to 19.8% in the June 2020 quarter, from 6% in the previous one. It compares with an average of 4.7% between 1990 and 2019.

The same Covid-19 uncertainty has also prompted a 6.5% drop in private business investment in the June quarter.

The weakness in domestic and international demand and the disruption to global supply chains are highlighted by the 10.6% fall in exports in the second quarter and the even sharper 19.1% drop in imports.

Australia’s overall economic collapse would have been much deeper had it not been for government spending – government consumption contributed 0.6% to June quarter growth while public investment contributed 0.1%.

But hold your horses. Before we get into the wailing and gnashing of teeth, note that Australia remains (to use the Frank Sinatra song), “top of the list, king of the hill, a number one …”

Comparing apples with apples, the 6.3% contraction in the Australian economy in the year to the June quarter is small beer compared with the regression in national output in our bigger peers.

Over the same period, GDP growth in the US declined by 9.1%, in Japan by 10%, in the eurozone by 15% and in the UK by a jaw-dropping 21.7%.

Moreover, grim as the stats may be, they reflect the state of the Australian economy of days past.

Although the lockdown in Victoria will continue to be a drag on overall economic growth in the third quarter (hopefully not beyond), the relative relaxation of restrictions in most other Australian states and in other parts of the world, especially China, suggest better economic growth readings for the domestic economy in future.

Not to mention the determination of the Reserve Bank and federal government to do whatever it takes to reverse the recession we didn’t have to have under their watch.