The ‘R-word’: Record recovery but economists warn of recession fears

Australia is poised to slip out of its strongest ever economic performance into one of its worst as state lockdowns aimed at stopping the spread of COVID-19 dent consumer spending and play havoc with the nation’s jobs market.

The Australian Bureau of Statistics will on Wednesday release the June quarter national accounts with economists tipping the economy to have expanded slightly over the previous three months, with estimates ranging between 0.1 per cent and 0.6 per cent.

Lockdowns have kept most people in their homes and businesses shut.Credit: Louise Kennerley

That would take annual economic growth to a record 9 per cent or even more.

Since the ABS started collating GDP figures in 1959, annual growth has reached 8.3 per cent on three separate occasions, the most recent in the 12 months to June 1984 when the country emerged from a devastating drought.

The big lift in annual growth will be due to last year’s June quarter, during which the economy contracted by a record 7 per cent, being replaced by this year’s June quarter.

But Treasury, the Reserve Bank and economists expect the current September quarter to show a sharp fall in growth, as COVID-related lockdowns cripple the economies of NSW, the ACT and Victoria. If lockdowns continue into the December quarter, the country may have entered its second recession in two years.

Treasurer Josh Frydenberg said no matter the June quarter result the economy faced significant challenges.

“That’s why we have to continue the economic support, both income support as well as business support and that’s why we have to stick to the plan, agreed to at national cabinet, a plan that will see restrictions ease at 70 per cent to 80 per cent (vaccination rates),” he said.

Commonwealth Bank head of Australian economics Gareth Aird said there would be a disparity between strong employment growth over the June quarter and modest GDP growth of about 0.3 per cent, largely due to stay-at-home orders.

He said no matter Wednesday’s results, the economy was already in a “manufactured” recession.

“The government, RBA and most in the media have refrained from using the ‘R‑word’ to date to describe what is currently happening in the economy. That will be inescapable ... if the ABS throws up a negative number,” he said.

Both Citi and AMP, who previously forecast a 0.1 per cent contraction over the quarter, are now predicting an increase of 0.5 per cent and 0.3 per cent respectively on the back of stronger than expected net exports data.

Capital Economics and Westpac expect 0.1 per cent growth in the June quarter, while Barclays upgraded expectations from 0.2 per cent to 0.5 per cent. ANZ remained at 0.4 per cent.

Data on Tuesday showed a drop in the size of Australia’s trade surplus, which will cut economic growth by a full percentage point. But there was a sharp lift in government capital spending over the same period, boosting growth and employment.

BIS Oxford Economics chief Australia economist Sarah Hunter said the GDP result will be “much softer” than the 1.8 per cent rebound recorded in the first quarter of the year as lockdowns came to an end.

“The extended lockdowns in NSW, Canberra and Victoria are clearly putting a significant drag on the economy – around 60 per cent of the population are currently in lockdown – which will be recorded in the September quarter data,” Ms Hunter said.

“The economy is likely to contract by well over 3 per cent, but with vaccination rates rising sharply, particularly in NSW and Victoria, state governments are flagging easing restrictions from mid-fourth quarter onwards, which will allow the economic recovery to begin before the end of the year.”

AMP Capital chief economist Shane Oliver said the current quarter is likely to show a 4 per cent decline in GDP due to the lockdowns, but a bounce back driven by reopening in the December quarter would help avoid a second recession.

“Not that it makes much difference of course for many businesses and workers hit by the lockdowns for whom it would feel like a recession anyway,” Dr Oliver said.

Labor shadow Treasurer Jim Chalmers said there wouldn’t be a first-rate economic recovery without a strong vaccine roll out.

“And unfortunately, no matter what the numbers say tomorrow, that’s what we’re seeing in the Australian economy,” he said.