The way forward for Australia’s economy looks smoother from here

Australia’s economic health keeps surprising on the upside. And a big driver of that is Australians themselves

Amelia Mastroianni, Ellie Skarbelis and Krissie Skarvelis hit the Sydney shops after the easing of restrictions in October. Picture: Gaye Gerard

Australia’s economic health keeps surprising on the upside. Analysts expect growth in the December quarter not only to overtake its pre-Delta peak but to keep going.

And a big driver of that will be Australians themselves.

They are sitting on hordes of Covid-19 savings and now at last have the freedom to spend up big on each other ahead of Christmas and then on themselves in the January sales.

If the four quarters of 2021 tell us anything, it is that the wildly different GDP reads are rear view mirror stuff. Barring a viral ­mutant force majeure, the way forward does look smoother.

Looking back at the September quarter, the GDP drop of 1.9 per cent may have been the third-largest quarterly fall since ABS records began in 1959, but it was still less that the analyst consensus. That consensus was for the economy to shrink by 2.7 per cent.

The big story in these national accounts is around consumer spending. This also fell less than expected in the third quarter, by 4.8 per cent.

In the fourth quarter spending is going to roar ahead, because people have finally hit a double whammy: huge savings and the chance to go out and spend them.

Through July, August and September, the household savings-to-income rate leapt to a remarkable 19.8 per cent, up from 11.8 per cent in the June quarter.

That savings figure was boosted by stimulus from government spending, which rose 3.6 per cent across all tiers of government: ­national, state and local. Government spending in the quarter made up a record 22.8 per cent of GDP.

Household disposable income rose 4.6 per cent, which VanEck’s Russel Chesler points out is the fastest rise since the global financial crisis. “Households are getting wealthier as their income from company dividends jumps with profits, as well as government support payments, and this will help to prop up consumer spending (which makes up around 60 per cent of GDP) in the fourth quarter of this year and in 2022,” he says.

Gareth Aird’s team at Commonwealth Bank has put some dollar figures around the household savings accrued compared to the “normal level of savings”.

“We put that at $50bn over the September quarter, which means savings are up by around $240bn over the Covid-19 period,” Aird says. “Based on our estimates for income and consumption over the fourth quarter, we expect that figure to swell to $260bn (12.3 per cent of GDP), which is up from our previous estimate of $230bn (11.5 per cent of GDP).”

CBA believes this war chest of cash will support consumer spending over the next two years, and that the economy will grow at 3.5 per cent this year and 4.4 per cent next year.

 

Capital Economics’ Marcel Thieliant is even more bullish, noting that even if stimulus payments are stripped out, household savings rates were about 10 per cent above the pre-virus level. “We expect GDP to expand by 5.0 per cent next year,” he says.

Both retail sales and jobs numbers for October are back to May 2021 levels – before Delta hit – even though lockdowns only ended in the middle of that month.

The Black Friday sales last weekend kicked off the latest shopping drive. Deloitte’s Chris Richardson says that families and businesses are getting better at juggling Covid-19. “The pain this time around was less. And the recovery looks set to be even faster,” Richardson says.

Wednesday’s GDP may have sunk 1.9 per cent, but when fourth-quarter growth numbers are released in March, Deloitte Access Economics is forecasting a full clawback of 2 per cent. CommSec’s Craig James agrees.

“It should not surprise if the economy rebounds in the December quarter by a similar or bigger magnitude as the September quarter contraction,” James says.

Despite the evident rebound, the different positions of the market and the Reserve Bank on when the cash rate will rise still stand.

The transfer of stimulus from government to households and business has yet to wash through the economy.

CBA notes that “these payments, while necessary to keep the economy going, are ­facilitated through an increase in public ­borrowing which has essentially been funded via the RBA printing press.

“In turn, we believe this process ultimately becomes inflationary.”

CBA says rate rises could start in November next year in response to higher inflation and a tighter jobs market with firmer wage growth.

That view runs counter to Reserve Bank governor Philip Lowe, who remains sceptical of firmer wage growth arriving within the year. The RBA is still guiding to a first rate rise in 2023 or even 2024.

The “living with Covid-19” risk is still very much alive, the current iteration being Omicron.

“Governments stress that lockdowns are a thing of the past, although that doesn’t mean that border restrictions won’t change from time to time, as we are seeing now,” said CommSec’s James.