Australian GDP falls 7 per cent — the biggest on record

Australian GDP fell another 7 per cent in the June quarter at the peak of COVID-19 restrictions.

This followed a 0.3 per cent fall in the March quarter when restrictions were first implemented, capping off Australia’s first recession in three decades.

The plunge is the biggest since GDP records began in 1959. This eclipsed the 2.4 per cent fall recorded in 1974 during the oil shock.

Government stimulus and increased business profits in some sectors had given economists hope the drop may not have been as bad.

Economists had been expecting a fall of between 5 and 6 per cent, but the positive figures weren’t enough to counter the negatives.

Most pertinently, government spending only added 0.6 per cent to GDP while a 12.1 per cent slump in household spending wiped out 6.7 per cent of GDP growth.

While some companies could reach consumers online, others were forced to shut up shop, which manifested in a 17.6 per cent fall in services spending.

Additionally, Australia’s savings rate rose to 19.8 per cent, up from 6 per cent at the start of this year. According to Capital Economics, this is the highest savings rate in almost half a century.

The two most affected states, New South Wales and Victoria, copped the brunt of it, with GDP plunging by over 8 per cent in both states.

Now what?

While consumer confidence has been on the rise it remains to be seen when the improved sentiment will translate into actions.

Although September quarter GDP figures aren’t due until December, economists are beginning to fear a third straight quarter of negative growth, albeit more in line with the March quarter’s drop.

But a hat-trick of negative growth results would mark Australia’s longest slump since 1982-83.

Nevertheless economists are taking solace in the few positive signs that the economy is recovering.

One indicator is Australian disposable household income rising by 2.2 per cent during the June quarter. Admittedly, the 41.6 per cent rise in social assistance payments accounted for much of this.

Yet Westpac’s Andrew Hanlan thinks the high savings rate gives people, “a considerable buffer to draw upon in coming quarters.”

Bloomberg’s James McIntyre said just four segments accounted for two thirds of the slump. These were vehicle use, travel, recreation and culture, as well as accomodation and hospitality spending.

“The sharp declines in these segments during Q2 sets up the possibility that Australia’s economy avoids a further contraction in GDP in Q3 despite the Victorian lockdown,” he said.