Australia is officially in its first recession for almost three decades, with the June quarter GDP numbers showing the economy went backwards by 7 per cent the worst fall on record and slightly worse than most economists had predicted.
The Bureau of Statistics numbers out today also confirmed the March quarter’s 0.3 per cent decline, meaning Australia’s economy has gone backwards for two consecutive quarters, meeting a common definition of recession.
It is the first time this has happened since 1991, although the scale of the downturn is vastly greater than “the recession we had to have”, where the economy shrank 1.3 and 0.1 per cent.
The 7 per cent quarterly GDP slump was also more than three times worse than the previous biggest fall of 2 per cent in June 1974.
The record fall in economic activity was driven by the private sector, much of which was shut down or restricted due to efforts to contain the COVID-19 pandemic.
Private demand took 7.9 percentage points off the economy, while a trade surplus and increased government spending added back 1 and 0.6 percentage points respectively.
“As expected, government spending and net exports provided support, but this was swamped by the collapse in private sector demand,” noted Sarah Hunter from BIS Oxford Economics.
The biggest drop in private spending came from a massive 12.1 per cent plunge in household expenditure, led by a 17.6 per cent fall in services spending, as many of these businesses were shut for part of the three-month period and restricted for the rest of it.
Accommodation and food was by far the hardest hit sector, with output down a whopping 39 per cent in the three months to June 30.
But Tushar Patel does not need the ABS or economists to tell him about the recession. He manages a group of three restaurants in Sydney’s west.
They were almost totally shut down during the June quarter and have since only been able to reopen with less than half their pre-pandemic staff – 25 down from 60 workers.
“We’ve only got one table here in Blacktown,” Mr. Patel told MM. “The dining has been literally shut down. Overall business is about 60 per cent down and it’s extremely hard to keep all the employees.”
Many of his staff were international students ineligible for Government assistance when they lost their jobs or had their hours cut.
This is reflected in the data, with a record 2.5 per cent drop in total wages, which the ABS said would have been much bigger without the Government’s Job Keeper subsidy.
Former airliner captain Matthew Purton is an extreme case in point. The Brisbane-based pilot of 27 years, and father of five, was stood down by Virgin in April.
He has been lucky enough to pick up work running a friend’s cafe, but the dramatic career change has come with an equally significant pay cut.
“It’s an 81 per cent drop in my income, so a lot of things we never used to worry about are going to be luxury items we just can’t afford,” he lamented.
While millions of workers are feeling the pain, the ABS measure of company profits released earlier this week showed a 15 per cent jump largely due to Government stimulus payments such as Job Keeper and cash flow assistance.
The ABS said the surge in profits and fall in what it terms “compensation of employees” (COE) meant that the profit share of national income was at a record high in June, while workers received less than half of national income for the first time since September 1959.
Matthew Purton is skeptical about some businesses’ actions, and pessimistic about his chances of getting back into the sky, even when restrictions are lifted.
“I think a lot of companies are taking advantage of the situation to force through changes that they would like rather than have to do, that means there will be fewer jobs for a long time for redundant pilots.”
While workers suffered, people who were already out of a job benefitted from the pandemic, at least temporarily, in the form of increased government payments.
The ABS reported a 2.2 per cent rise in disposable household incomes, with social assistance payments jumping a massive 41.6 per cent due to the coronavirus supplement and a greater number of people claiming unemployment benefits.
Indeed, Asia-Pacific economist Callam Pickering said this number showed Government support was all that was preventing an even more catastrophic recession.
“This economy is being held together with duct tape by Job Keeper and Jobseeker,” he commented.
Treasurer Josh Frydenberg acknowledged the economic impact of the “COVID-19-induced recession” and said the Government was helping people through it.
“We’ve done everything possible to cushion the blow for the Australian community from COVID-19,” he told reporters.
But the Opposition treasury spokesman Jim Chalmers said he is worried that many of those receiving Government support will be relying on it for many years.
“Our big fear for the economy is that this spike in unemployment concentrates and cascades through the generations, in a way that sacrifices a whole generation of Australian workers,” he said.
With government payments boosting incomes and fewer ways to spend money, as well as financial fears from the pandemic, households were saving around $20 for every $100 they earned, a big increase from $6 at the start of the year.
That is the highest savings rate in almost half a century, according to Capital Economics. It gives people “a considerable buffer to draw upon in coming quarters” added Westpac’s Andrew Hanlan.
While this might be Australia’s worst recession on record, it is not as bad as the downturns experienced in countries which have suffered worse coronavirus outbreaks.
Deloitte Access Economics senior economist Sheraan Underwood noted that only a handful of countries had seen smaller GDP falls than Australia, and they were generally ones where the virus was even more well-contained.
“The underlying equation is simple,” he observed. “The greater the success against the virus, the greater the success in protecting economies against the pandemic.”
That appears to apply too within Australia, where the states with the most cases had the worst economic performance as well.
“NSW and Victoria saw the sharpest declines, with State Final Demand falling 8.6 per cent and 8.5 per cent respectively,” observed Ms Hunter. “Tasmania was also relatively hard hit, as the loss of international tourists and, to a lesser extent, students weighed on spending.”