Australia is back in business after smashing GDP forecast

Australia’s GDP has grown by 3.1. per cent in the fourth quarter of 2020, smashing market’s expectations of 2.5 per cent.

This follows the 3.4 per cent growth registered in the previous quarter, and is the first time in 60 years that the GDP has grown by more than 3 per cent for two consecutive quarters.

However, the overall economy has shrunk by 1.1 per cent for the full year, compared to 2019.

Household spending increased by 4.3 per cent, private investment by 3.9 per cent, and compensation of employees rose 1.5 per cent. Victoria led the charge in household spending – recording a 10.4 per cent rise for the quarter .

Today’s data represent a complete turnaround after the economy was plunged into its first recession in 30 years in the middle of 2020. The GDP shrank by a massive 7% in the April-to-June quarter, after falling by 0.3% a quarter earlier.

Australia leads the world

Today’s numbers are an indication that the Australian economy is back on track, with Federal Treasurer Josh Frydenberg calling the economic performance “world leading”, and that it has outperformed other advanced economies in 2020.

According to CBA analyst, Gareth Aird, Australia is experiencing a V-shape recovery, and today’s data might indeed have vindicated his words.

“In short, the Australian economy will have clear air once the vaccine rollout is complete and the very thing that has been holding the economy back will no longer be an issue,” Aird said.

CBA also expects to see a strong rebound in GDP for the full year of 2021 — of 4.2 per cent annual growth in 2021.

Rotation to cyclical stocks

There has been a shift in sentiment in the markets since vaccine rollouts were announced across the globe. Inflation expectations are starting to seep in, and investors are positioning themselves for a period of reflation – generally described as an upswing in the economy where both growth and inflation are accelerating.

These expectations have resulted in the sharp spikes of bond yields seen over the last month, and contributed to the rising Aussie dollar. In light of that, the Reserve Bank (RBA)’s decision yesterday to maintain its quantitative easing targets is seen by analysts to be spot on.

The market has also seen a rotation of equity trades away from growth to cyclical stocks. Those who wonder which stocks will be in play in this cyclical growth, investment firm T.Rowe Price reckons Eagers Automotive (ASX:APE) is in for a big year as Aussies are buying new cars again.