• Stephen Roberts

Firing on all Cylinders

Australia has experienced a strong and quick recovery from the 2020 recession. The Q1 2021 GDP report due next week will see annual y-o-y GDP growth enter positive territory; up from –1.1% in Q4 2020 and a low-point of –6.3% in Q2 last year. How far annual growth moves into positive territory in Q1 depends upon the strength of growth in the quarter.


The Q1 growth reading is unlikely to match the record-breaking 3.4% q-o-q in Q3 and 3.1% in Q4, but will still show growth in every major category of spending. Such broad-based growth in spending speaks to the momentum of the current economic recovery and why - barring any deliberate policy move to restrain growth - it will keep gathering strength.


Before previewing the Q1 GDP report next week, it is worth revisiting the growth drivers in Q4 last year. The broad spending categories in the economy are consumption, investment (gross fixed capital expenditure), and exports (foreigners spending on goods and services produced in Australia). To tally what is spent by Australians with what is produced in Australia, imports (Australians’ spending on goods and services produced overseas) are subtracted and an adjustment is also made for change to inventories.

In Q4 2020 spending was higher than expected. In terms of consumption spending the largest component; household consumption - accounting for more than 60% of GDP - rose by 4.3% q-o-q in real terms and contributed 2.3 percentage points (pps) to GDP growth in the quarter.


Gross fixed capital expenditure, which captures spending on housing, business investment spending and government investment spending, rose by 3.6% q-o-q, contributing 0.8pps to GDP for the quarter. Strong housing activity reflected in spending on new housing construction in the quarter; up 4.1% q-o-q, contributing 0.2pps to GDP. Spending on costs related to buying existing homes (ownership transfer costs) was up 15.2% q-o-q, contributing 0.2pps to GDP.


Business investment spending was a mixed bag in Q4. Non-dwelling construction fell 6.2% q-o-q detracting 0.1pps from GDP but spending on machinery and equipment lifted by 8.9% q-o-q contributing 0.3pps to GDP.


All told Australian domestic spending was strong and broadly-based in Q4. Some of that spending went on goods and services produced overseas; up 4.9% q-o-q, detracting 0.9pps from Australian GDP in the quarter.


The forces driving strong domestic spending in Q4 were robust income growth, still driven in large part by government support, a household saving war chest, low borrowing interest rates, growing confidence that small COVID-19 outbreaks could be contained with only limited disruption to daily life and evidence that the economy and employment were growing faster than expected.


These forces driving growth were all in play again during Q1. Some elements of domestic spending may grow faster than in Q4. Housing construction may have risen more than 5% q-o-q, contributing 0.3pps or more to GDP in Q1. However, even though housing activity was booming in Q1 it is hard to see how ownership transfer costs could match or beat the 15.2% q-o-q increase reported in Q4. A rise of perhaps 5 to 7% is on the cards, but that would still contribute 0.1pps to GDP.


Another spending category that will not match its stellar growth in Q4 is household consumption spending. We know already that Q1 real retail sales fell by 0.5% q-o-q after rising by 2.5% in Q4. Back in Q4 rising spending on services lifted the 2.5% lift in retail sales to a 4.3% increase in household consumption. Spending on services in Q1 should help to lift household consumption around 0.3% q-o-q but that contributes only 0.2pps to GDP, well shy of the 2.3pps contribution in Q4.


On a more positive note, business investment spending looks stronger in Q1 than in Q4, especially non-dwelling construction that should make a growth contribution. Stronger growth contributions from government consumption and investment spending should also have occurred in Q1.


Exports and imports both rose strongly in Q4. In real terms imports up 4.9% q-o-q edged out exports up 3.8% q-o-q producing a net 0.1pps detraction to growth in the quarter. In Q1 exports and imports have both grown strongly again but more closely matched. The net export growth contribution in Q1 looks flat.


Looking at the various contributions to Q1 GDP it is again a case of broad-based positive contributions, although not as strong as in Q4. Nevertheless, the various contributions to growth on our forecasts total 1.5% q-o-q GDP growth and that takes annual GDP growth above the zero line to 0.6% y-o-y. Around the world few economies are back to positive y-o-y GDP growth. The fast-growing US economy has pushed just into positive territory in Q1 at 0.4% y-o-y while the EU is languishing at –1.6% y-o-y and Britain is mired at –6.7% y-o-y.


Australia’s Q1 GDP report is due next week, but we have already early indicators of Q2 GDP. Preliminary April retail sales rose 1.1% m-o-m and further increases are likely in May and June. Q2 real retail sales growth is shaping up around 2% q-o-q, a big rise from –0.5% in Q1 and heralding a large household consumption contribution to Q2 GDP. At this stage we see Q2 GDP rising at least 1.0% q-o-q lifting annual GDP growth above 9% y-o-y.


The Australian economy is firing on all cylinders and is set to report extraordinarily strong economic numbers over at least the next three months.

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