Aus economy: actually back in black

GDP rose a strong 1.8 per cent quarter-on-quarter and is now 1.1 per cent above pre-pandemic levels. This strength is consistent with the ongoing improvement in the labour market and leading indicators point to further strength over the coming year.

"All states and territories are back above pre-pandemic levels, except Victoria.”

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While policy support is still very high, the economy has weathered the withdrawal of emergency fiscal stimulus unexpectedly well. Business conditions point to ongoing solid expansion, consumers still have a very large savings buffer and high levels of capacity utilisation will support investment. The labour market recovery is poised for further gains with job ads running nearly 30 per cent above pre-pandemic levels.

Activity rose in all states and territories except the Australian Capital Territory. Western Australia was the strongest performer with growth of 3.0 per cent quarter-on-quarter in state final demand bringing annual growth to 3.8 per cent. All states and territories are back above pre-pandemic levels except Victoria (0.3 per cent year-on-year).

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Looking at the industry breakdown, the strongest growth was in sectors still recovering from the pandemic slump. Other services (+5.8 per cent quarter-on-quarter), arts & recreation (+5.7 per cent), hospitality (+5.2 per cent) and transport (+5.0 per cent) all showed strong gains.

However, despite the overall strength, there were a number of industries where activity contracted with information media (-1.9 per cent), retail (-1.0 per cent), utilities (-0.9 per cent) and public admin (-0.7 per cent) all falling.

Not surprisingly, hospitality, transport, and arts & recreation are three of the seven industries where output remains below pre-pandemic levels.

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Importantly, the private sector is recovering well. Private final demand rose 2.2 per cent quarter-on-quarter and is up 0.8 per cent over the past year. Household consumption has been a key driver of the recovery but other sectors are taking over.

Consumer spending rose 1.2 per cent quarter-on-quarter in the March quarter (a little less than we expected) and is now back to March 2020 levels. The sharp recovery in housing construction (+6.4 per cent) and business investment (+3.6 per cent) contributed strongly to growth. In contrast to the strength in the private sector, public sector spending rose just 0.2 per cent.

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The 1.2 per cent quarter-on-quarter rise in household consumption was supported by the ongoing recovery in hospitality spending (14.8 per cent), transport (+8.8 per cent) and recreation (+3.3 per cent). Households slowed their car purchases (-2.7 per cent) although they are still running 21 per cent higher than last year – a clear example of how the goods sector is booming in the current conditions. The recovery in services spending continues but, in contrast to retail sales, other spending remains well below pre-pandemic levels.

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Housing has been a clear beneficiary of policy stimulus. House prices rose 2.3 per cent month-on-month in May and are 7.7 per cent higher over the past three months – the largest quarterly rise since the late 1980s.

Lower mortgage rates have been a key factor and are also supporting housing construction - although the HomeBuilder program is probably a bigger factor. Housing construction rose 6.4 per cent in the quarter, driven by both new building and renovations.

Recent strength in approvals suggest housing construction activity will lift again in the second quarter. Clearly some of this is a pull-forward with implications for growth down the track; but, as a measure to get the economy recovering after the pandemic slump, there’s little doubt HomeBuilder has been very successful.

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Business investment also jumped 3.6 per cent quarter-on-quarter which is the fastest quarterly rate of growth in over three years. Equipment investment drove the result with an 11.6 per cent jump, helped by the Government’s temporary full-expensing measures.

Non-residential construction offset some of the strength with a 1.4 per cent fall. Both mining (+2.5 per cent) and non-mining investment rose solidly (+3.9 per cent).

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Uncertainties around the outlook remain but must be seen in the context of the much better-than-expected position the economy is now in.

The biggest risk to the outlook comes from the pandemic itself as Victoria’s lockdown shows. While the last year has shown confidence and spending tend to bounce back quickly after short lockdowns, the current lockdown may have a larger impact given the absence of JobKeeper.

Felicity Emmett is Senior Economist at ANZ