Next week’s June quarter GDP result will be the first test of whether Australia can avoid a double dip technical recession this year. Due to lockdowns in New South Wales and Victoria, it is already clear that Q3 (September quarter) GDP will be significantly negative. Australia’s economy in recent months has dropped into a large hole.
But irrespective of the depth of the Q3 hole, a “technical” recession requires two consecutive quarters of negative economic growth. So the question then becomes whether either the June quarter and/or the December quarters might also produce negative growth.
The good news is that, so far at least, negative June quarter growth next weeks seems seems unlikely. Although there are still a few building blocks to come early next week, such as inventories and net exports, the indicators so far available suggest a positive growth outcome.
- Aggregate weekly hours worked rose 2.9% in the June quarter, compared to declines of 0.5% and 8.3% in the March and June quarters of 2020, which were associated with negative GDP outcomes.
- Retail sales volumes rose rose 0.8% in the June quarter, which bodes well for overall consumer spending. Indeed, to some extent the June quarter may reveal relative strength in non-retail consumer service spending as most parts of the country were not “locked down” for most of the quarter.
- Although residential construction slipped 0.1% in the quarter, total non-residential construction and spending on private plant and equipment rose 0.3% and 4.3% respectively, which bodes well for business investment during the quarter.
- The trade surplus continued to expand in the quarter, from $24.4b to $28.1b which bodes well for another positive contribution from net exports.
Of course, whether Australia manages to escape another technical recession also depends on the December quarter GDP outcome. And on that score, we remain crucially dependant on the lockdown situation across the country.
While the recent extensions of the NSW and Victorian lockdowns adds to the risk of a negative Q4 outcome, the brunt of the lockdown related step down in GDP took will be concentrated in the current September quarter, suggesting the level of GDP need not necessarily decline further in Q4. So even a worst case scenario where current lockdowns are extended beyond September, we might still narrowly avoid a technical recession, if only because most of the decline in activity would have already taken place.
Assuming the vaccine rollout proceeds apace, moreover, there is a good chance for some bounce back in activity from late September/early October – as those fully vaccinated at least are granted greater freedoms.