Daily Commentary BY THE CURVE TEAM –

Q2 GDP Plummets

3rd of September, 2020

Yesterday Australia officially fell into a recession as the economy was ravaged by Covid-19.

Following a 0.3% fall in Q1, GDP fell 7% for Q2 as lockdowns were imposed across the country through April and May especially. This was s larger fall than the market expectation of a 5.7% fall.

Falls in consumption explained 98% of the fall in GDP, with it down 12% for the quarter. Q3 should be more rosy, as retail sales in July showed an increase of 12.2% from a year ago. Retail spending does not consider all consumption, but should assist in a recovery to consumption for the Q3 numbers.

The sheer impact of government wage subsidies were on show, with wage incomes down 2.5% despite a 9.8% fall in hours worked. Household gross disposable income was actually up 2.2%. JobKeeper and JobSeeker payments were the driving force behind these strong wage and income numbers.

It contributed to a lift in household savings, up from 6% in Q1 to 19.8% for Q2. This figure will be monitored closely, as it directly relates to consumption and will partially act as a gauge on confidence. Often after severe economic shocks the savings rate increases, so lower savings can be indicative of less risk aversion.

Without the recent Victorian lockdowns, a recovery in Q3 would have been expected. Now the Q3 numbers are expected to be around even.

It is worth noting as well, our fall in GDP was not as substantial as elsewhere in the world. The US was down more than 9%, Europe over 12% and the UK over 20% , so relative to the world Australia has performed well.

Trade balance data for July is out today, with the surplus expected to be 5.4 billion, down from 8.2 billion in June. Although a fall is expected, the surplus remains large which is contributing to economic growth.

Josh Stewart

Client Relationship Manager