The 7% fall in GDP in the June quarter unveiled by the Australian Bureau of Statistics today is testament not merely to the extraordinary impact of the pandemic and associated lockdowns on the Australian economy, but on the crucial role of government in the economy.
This is a set of numbers to make John Maynard Keynes proud.
The record result means that GDP shrank by 6.3% over 2019-20. Private demand, unsurprisingly, prompted the collapse, falling 7.9% in the quarter; household spending — mostly on services — fell 12.1%, cutting 6.7 percentage points from GDP and driving the household saving ratio to a monster 19.8%, the highest rate since the Whitlam years, while dwelling investment fell 7.3%.
So Australia is technically in recession for the first time since 1991, as expected. But the recession would have been significantly deeper without public spending – and of course the tens of billions spent by the Reserve Bank to drive down interest rates for business lending to 0.25% and keep them there.
The RBA yesterday announced it was expanding and extending its Term Funding Facility, now up to $200 billion, to enable business lending rates to continue at 0.25%.
Public demand added 0.6% to GDP in the quarter — by normal standards a massive amount, but dwarfed by the impact of the lockdowns. Tuesday’s government finance figures showed the general government net operating balance — that’s all governments, not just the federal government — falling $82 billion in the June quarter, reflecting a 42% rise in general government spending to over a quarter of a billion dollars in a single quarter.
The Commonwealth government contributed the majority of the fall, which reflects new economic support packages provided to businesses, workers, and households, in response to the COVID-19 pandemic.
Without that spending, the economy would be a smoking ruin. Retail sales in the quarter in volume terms detracted 3.4% from GDP because of the huge slump in April, which in turn saw a 3.0% drop in inventories as companies sold goods and didn’t replace them with new orders.
Wages fell 3.3% in the quarter. Private capital expenditure fell 5.9% to the lowest level since 2016 and forward spending plants also fell sharply.
The trade data was more mixed. Imports fell 14% and exports dropped 8% (mostly due to lower prices for coal and LNG). The fall in imports a fall in demand for cars, lower oil and petrol prices and volumes (because the pandemic hit demand).
Tourism exports and imports both fell because of tourists can’t come in, but Australians can’t travel overseas either. Car imports fell $2.7 billion. With record sales of iron ore and the slump in imports, Australia recorded another record current account surplus, which added 1% to GDP.
Another winner was business profits, bolstered by government payments. The profit share of total income exceeded 30% for the first time in more than sixty years, with the wage share of income falling below 50%.
Compensation of employees fell a record 2.5% this quarter, even though average compensation per employee rose 3.1%, reflecting job losses in part-time and lower paid jobs.
The quarterly national accounts are a more backward looking data set than most from the ABS. By the time they are released in Australia, it’s the first Wednesday of the last month of the following quarter, so in some cases the influences of the data could be four to five, even six months old.
And the contraction of the June quarter is probably the least surprising result in Australian economic history. What will be really interesting is how the economy performs in current quarter — something we won’t know until early December.
But that, too, will depend heavily on public spending.