Australia avoids a recession thanks to a jump in consumer spending

Australia, the most China-reliant economy in the developed world, is growing at a faster pace than every G7 economy. GDP expanded 1.1 per cent in the fourth quarter from the previous three months, lifting annual growth to 2.4 per cent (below long-term trends), according to data from the Australian Bureau of Statistics.

The economy rebounded from a surprise 0.5 per cent contraction in GDP in the third quarter. That was the first negative quarterly growth since 2011 that raised fears that the economy could enter a technical recession, which is defined as two consecutive quarters of negative growth. Australia is on track to surpass the Netherlands’ record of 26 years of consecutive growth between 1982 and 2008.

A fourth-quarter rebound was driven by strong consumer spending, government investment and a surge in company profits linked to rising commodity prices.

Household spending, which accounts for more than half of Australia’s GDP, rose 0.9 per cent on the previous quarter, contributing 0.5 percentage point to GDP growth. Household spending was driven by a fall in the savings ratio from 6.3 per cent in the three months through September to 5.2 per cent, the lowest level in more than eight years.

Public investment surged 7.7 per cent, adding 0.3 percentage point to overall growth. Private investment increased 1.5 per cent, contributing 0.3 percentage point to growth. Both subtracted from GDP in the previous quarter.

Exports advanced 2.2 per cent, while imports rose 1.4 per cent. Net exports contributed 0.2 percentage point to growth. The terms of trade, the value of exports relative to imports, rose 9.1 per cent from the previous quarter. On the annual basis, the terms of trade jumped 15.6 per cent boosted by a surge in commodity prices. Thanks to a strong showing from the mining sector, overall company operating profits rose 20.1 per cent in the fourth quarter on the previous three months, the fastest gain since the first quarter of 2001. Profits were up 26.2 per cent over the year earlier.

The unemployment stands at 5.7 per cent, but the economy is not creating full-time positions. Wages and salaries fell 0.5 per cent during the quarter, which is an explanation why people used their savings to fund consumption. Employee compensation was up 1.5 per cent from the year earlier. With wage growth at a record low and household debt at a record high, the pace of consumer spending could be unsustainable.

The Reserve Bank of Australia has kept its key interest rate at a record low of 1.5 per cent since August as it tries to help to ease the economy’s transition from mining-driven growth towards services industries. Low interest rates, however, have sent property prices soaring, particularly in Sydney and Melbourne, pushing homeownership beyond the reach of average earners. Inflation is below the central bank’s target of 2 per cent to 3 per cent, but another interest rate cut is highly unlikely as it would further inflate house prices and drive household debt even higher.

The government projects a budget surplus in 2021, but it is struggling to get spending cuts needed to balance the budget and safeguard Australia’s AAA rating through the Senate, the upper house of parliament.

WPJ

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