Dip and rise
Updated: Feb 24, 2020
Australian quarterly GDP growth readings are likely to be unstable through 2020 on our latest forecast ranging from -0.3% q-o-q, or worse for Q1, to perhaps +1.0% q-o-q or higher for Q3. Quarterly GDP growth through 2019 was stable by comparison, averaging +0.5% per quarter (assuming Q4 GDP due out early next month is close to our forecast +0.5% q-o-q) tracked a narrow range between +0.4% q-o-q and +0.6% q-o-q.
In 2019, relatively stable quarterly GDP growth around a +0.5% q-o-q average implied a gradual improvement in annual GDP growth to +2.0% presenting a report card for the economy of “doing OK but could do better”. The RBA delivered three rate cuts in mid-2019 and at the same time, households received a tax cut as well. By late 2019, there were signs that lower interest rates were adding momentum to a lift in home buying activity that was already underway at the time of the first RBA rate cut in June. There were also the first signs of stronger retail spending late in 2019 from the tax-cut boost to household disposable income.
Further impacts from lower interest rates and the tax cut will flow through to spending in 2020, but in Q1 the positive impact on GDP growth will be more than offset by the hit to the economy from the extensive bushfires and coronavirus impact on various parts of the Australian economy including education, tourism and exports and imports.
Our forecast for Q1 GDP starts with what things would have been in the absence of an abnormally severe bushfire season and coronavirus outbreak. With falling unemployment in late 2019 and plus better household spending conditions assisted by lower interest rates and the earlier tax cut, Q1 2020 GDP was on track to make around +0.6% q-o-q.
It is hard to estimate accurately the loss of spending in the Australian economy from the bushfires and coronavirus but direct losses to tourism and education services would be at least $1.5 billion in Q1, an equal hit to goods exports and perhaps another $1 billion spending loss from irrational fears about coronavirus and people being more cautious about their daily activities. A loss of around $4 billion in Q1 translates to 0.9 percentage points detraction from GDP taking our Q1 GDP growth forecast down from +0.6% q-o-q to -0.3% q-o-q.
Turning to Q2 2020, again a reasonable GDP forecast without abnormal bushfires and coronavirus would have been +0.6% q-o-q or possibly +0.7%. GDP growth would have been gathering pace slowly helped by housing recovery and earlier policy stimulus. Bushfires are unlikely to be detracting from spending in Q2. Most likely unusually heavy rain in Eastern Australia in early February brought an early end to the bushfire season. Extensive Government payments to assist bushfire recovery will be starting to impact in Q2, which will have a much sharper positive impact on spending and GDP growth in Q3 and beyond.
Detractions to spending from coronavirus may extend into Q2 although it is reasonable to assume that bans on inbound non-Australian travelers from China will be lifted in Q2. There will still be detraction from GDP growth in Q2 but less than in Q1. Our estimate is that detraction from GDP growth will be around half the detraction in Q1, taking the GDP forecast from +0.6% or +0.7% q-o-q to +0.2%.
By Q3 2020 it is highly likely that recovery spending will be in full swing. Spending will be lifting from a crisis-affected low base in Q1 and Q2, possibly with the assistance of more policy stimulus. It is reasonable to expect GDP to lift at least 1.0% q-o-q in Q3 and possibly even more strongly in Q4.
These large changes in quarterly GDP growth in 2020 play havoc with year-on-year GDP growth running down from about +2.0% y-o-y in Q4 2019 to +0.8% y-o-y or less in Q2 2020. It may then push up sharply to +2.1% y-o-y or more in Q4 2020. One issue is how should the RBA respond with monetary policy in this volatile growth period?
If the dip in annual GDP growth looks temporary with confidence of a “V” shaped post-disaster recovery in growth, then the RBA should do nothing and leave the cash rate unchanged at 0.75% throughout 2020.
The best indicator helping to determine the extent and duration of the GDP growth dip in 2020 is the health of the labour market. Any material lift in the unemployment rate could promote a self-feeding cycle of weaker economic growth, causing the first-half 2020 dip in GDP growth to run deeper and longer.
In late 2019 the monthly labour force reports for November and December were both better than expected, causing the unemployment rate to decline to 5.1%. Employment growth will most likely be softer in January (data release later this week) and February with a small rise in the unemployment rate. If the unemployment rate rises to no more than 5.3% (the peak rate in 2019) in the first few months of 2020, the RBA will probably leave the cash rate unchanged, our base forecast at this stage.
If, however, unemployment rises more sharply towards 5.5% threatening to deepen and lengthen the bushfire/coronavirus GDP growth dip then the RBA will respond with more cash rate cuts.