At the start of the month, the prevailing commentary on the Australian economy was pessimism. Sentiment about the Australian economy has since improved. The Q2 GDP number was above consensus and would have been even stronger without supply-chain constraints or skilled labour shortages. The NSW Government announced roadmap means that the Sydney population will face fewer restrictions in Q4 (how much less will depend upon the number of new cases). And while the new virus numbers from Melbourne have been on the rise in recent weeks, rising vaccination rates and reduced mobility should see restrictions eased before year-end. The bounce-back in activity when restrictions end will make it virtually impossible for there to be negative GDP growth in Q4.
There is no doubt that the data released to date points to a substantial fall of GDP in Q3. But the decline may not be as sharp as some of the more pessimistic forecasts (ie, -4% or worse). This view was supported by the data released over the past week.
It is no surprise that with all the dismal news, business confidence was very weak in August. Confidence is higher than it was during the depths of last year (and during the GFC). There was even some improvement in August! But confidence is not necessarily the same thing as business activity. Indeed, firms indicated that not only were conditions above average in August, but they actually had improved a little from July. One of the reasons was that they experienced a jump in new orders in August. This helped boost profitability.
Understandably, conditions differ between regions and sectors. NSW and Victorian firms are finding the going toughest. Those in WA, SA and Tasmania are having a better time. Firms that have business models involving large number of people (transport, recreation and accommodation and food services) are more negatively influenced by COVID. Mining is less impacted, and is helped by the high level of commodity prices. Retail is not doing as well as last year when consumers purchased a large number of durable items. The shutdown in Sydney and capacity limits have impacted the construction sector.
Consumers agree with firms that conditions worsened in Q3. Concern about the state of the economy is one reason they are saying they are not spending. Another is that they can’t spend, given that most shops in Sydney and Melbourne are shut.
But when you ask households about the state of their own finances, they are more optimistic (and increasingly so since June). This probably reflects the impact of government income support programs. And like firms, households remain optimistic about the future. Sure, they have (modestly) marked down their view of the economy next year (and with some justification). But they remain very bullish about where the economy will be in five years’ time. And that optimism about the medium-term has not changed over the course of the current lockdowns.
One thing that households have become more pessimistic about is buying a house. This reflects rising affordability concerns due to the sharp rise in house prices over the past year. This concern is prevalent across all states, albeit less so in SA and WA. Affordability worries are the reason why there is a declining share of home loans taken out by first-home buyers. But the rise in house prices (and an increase in rents) has attracted investors back to the residential market. This coincides with an uptick in the proportion of households nominating housing as a good investment. That proportion is low by the standard of the past forty years.
And then we come to the August employment data. In my view, it was a weak number. The ‘good’ news was the unemployment rate fell. But that was completely misleading. There was a big fall in the number of jobs (over 140,000), a rise in the under-utilisation rate (because more people were working fewer hours than they wanted), a substantial decline in hours worked (notably in NSW) and a large drop in the participation rate. In short, there was a lot less work done in August.
Things should only get better from here. The pace of vaccination means that NSW is on track to re-opening parts of the economy in early- to mid-October. The ACT will also likely reduce restrictions in that month. Victoria will take longer, but should be re-opening by December. This means that GDP growth could be in the order of +2% in Q4. This could prove optimistic if rising case numbers following re-opening (which has happened in other countries) lead to either renewed government restrictions or an increase in consumer and business risk aversion.
The bottom line is that Q3 has been a difficult one for society and the economy (notably in NSW, Victoria and the ACT). Economic growth will decline in the September quarter, but maybe not as much as some fear. Business and consumer optimism about the economy in 2022 and beyond remains generally positive. With interest rates set to remain at rock-bottom levels and fiscal policy supportive, there are good reasons to believe that the economy will end 2022 in a better state than it will at the end of this year. Obviously, luck with the health outcomes will be required. But a dramatically improved vaccination effort means there is also optimism on that front.