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Economic and Financial Market Update: The March Quarter Economic Report Card

10 June 2020

Summary:

Economic growth in the March quarter fell, but not as much as had been feared;
It is certain there will be a far bigger decline in GDP in Q2;
But the economy is already starting to pick up;
There can be cautious optimism about the future.

Some years ago I went to a place that had water slides. On the largest slide there was a jump off a ledge landing on a steep slide. My first look down that slope still sticks in the memory (it was fun though once I jumped). And to my mind that sums up the March GDP numbers: the economy on the edge just about to take a steep drop.

For some time there was a worry about the economy in Q1. There was the Bushfire-impacted January, the China-shutdown in February and a home grown lockdown in the back end of March. All things considered the 0.3% fall in GDP growth in the quarter was pretty good. And by global standards it was top drawer.

The numbers told the expected story. Consumer spending was down big time (apart from on food, wine, home computers and bikes). The big jump in Government welfare payments started to hit bank accounts but was not all spent (causing a jump in the household saving ratio). Capex spending (particularly outside of mining) took a dive. Residential construction again struggled. The economy was powered by the government (and a massive fall in imports).

Manufacturing (sanitisers, toilet paper) had a good quarter, as did iron ore miners (and super funds were busy meeting redemption requests). Airlines, hotels and restaurants had a very tough time. Activity in the health sector was broadly flat. Busy COVID testers were offset by the stop in elective surgeries and a fall in attendance to doctors and dentists.

It is certain there will be an even bigger decline in the June quarter (I expect -7.5%, other economists have bigger declines). A significant chunk of the economy was shut for half the quarter (albeit that started in late March). This means consumers couldn’t spend even if they wanted and so were forced savers. Weak spending means low profits. In April firms said their forward order book was by far the worst they have seen in the past 20-plus years. The underutilisation rate shot up to a record high (nearly 20%). Hours worked (a decent proxy for economic activity) looks to be down 8-10% in the June quarter.

But the June quarter will be the nadir. The economy has been opened up a lot quicker than most forecasters had assumed. Consumer confidence starting picking up in mid-April as the number of new cases went down. Credit/debit card data indicates that household spending has been increasing as shops and restaurants have re-opened. The quicker end to social distancing policies and aggressive government response has meant that the fall in GDP will not be as bad as a number of analysts (including the RBA and the Treasury) had feared. And this also means the forecasters are revising up their views about the September quarter. Decent growth is also on the cards for the December quarter as consumers and businesses gain more confidence.