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Economic and Financial Market Update: The Return Journey Begins

11 September 2020

Summary:

The June quarter GDP numbers were the nadir;
The services sector was hit particularly hard;
Government support meant consumer incomes actually rose in the quarter;
Things are improving;
How much they will improve will depend upon business and consumer confidence
And importantly, the extent of fiscal and monetary support.

We knew it would be bad, and it was. June quarter GDP growth in Australia declined at its fastest ever pace since quarterly records began. And the RBA believes that it was the biggest fall since the 1930s Great Depression. Following on from the decline in GDP that happened in Q1, such weakness would be expected to have a notable impact on the labour market. And it has.

Outside of Government and some utility and mining sectors, very few industries managed to grow. The impact on some sectors was eye-boggling. It is no surprise to see that those are the sectors looking to take an axe to capex budgets this financial year. As would be expected in a very uncertain economic environment, building up saving and cutting unnecessary spending was a theme of the second quarter.

Government income support was also a massive boost for households. Despite GDP growth being down 7% in the quarter, household incomes actually rose. This had nothing to do with the size of pay packets which fell. Many took the opportunity to build their saving that will help provide a buffer if the economic times remain tough.

One of the key issues for demand will be the state of business and consumer confidence. In that regard the evidence from the most recent NAB business survey was not good. Business confidence actually improved a little but firms reported that business conditions deteriorated in August. One reason for optimism is that consumer confidence improved notably in September. Ongoing government fiscal support (as well as mortgage payment holidays) are leaving many family budgets in decent shape. There is also good news globally. After being smashed in Q2, many developed countries look to be on track to record impressive growth rates in Q3.