Australia is in its first recession (defined as two back-to-back quarters of negative GDP growth) in 29 years. While only one quarter of negative of GDP growth has been recorded so far, Q1 2020 at –0.3% q-o-q, it is all but certain that Q2 will show a much larger GDP fall than in Q1, simply because the quarter got off to a such bad start in April and part of May when the shut-downs needed to contain the spread of covid-19 hit hardest.
During May success flattening and reducing the covid-19 curve of infections has permitted an early start lifting some restrictions, a process that looks set at this stage to involve progressive lifting of most but not all restrictions during June. Restoring output and jobs in some parts of the economy will take time. Nevertheless, the economy will be lifting from a position of very restricted and much reduced output in April and early May to a pronounced lift in output later in May and in June.
The lift in economic activity in the second half of Q2 cannot offset the very sharp fall in the first half of the quarter. Turning briefly from the output of the economy to spending in the economy retail sales the biggest part of household consumption spending which in turn is nearly 60% of spending in the economy and the biggest single component of expenditure-based GDP fell by a record 17.7% m-o-m in April. In the best of economic circumstances, it would be impossible to recover even half of that fall over the following two months.
As it is, economic circumstances are not the best. More than 590,00 people lost their jobs in April and many more are on Job-keeper support (technically still employed but waiting to return to actual work in many cases). The level of economic pain in the household sector has risen and uncertainty about the economic future is high. Unsurprisingly, households have become more cautious and are trying to save more from available income. In Q1 2020 the household savings ratio lifted to 5.5% from 3.5% in Q4 2019.
This precautionary impetus among households to try and save more is probably still an important force in Q2 creating a headwind restraining the rebound in household consumption spending later in the quarter. It is highly likely that real household consumption spending will fall in Q2 and much more than the 1.1% q-o-q fall that occurred in Q1 which contributed –0.6 percentage points to the –0.3% q-o-q GDP result. Without the fall in household consumption expenditure in Q1 GDP would have grown.
The current recession (negative GDP growth in Q1 and a likely bigger fall in Q2) is mostly about a downturn in household consumption spending and a lift in precautionary saving adding to the extent of the downturn in household spending and potentially prolonging it. Most recessions are similarly based but usually have another element adding to the extent of the downturn with job losses causing a fall in household income.
This recession is different in that household income is being supported on a scale unprecedented in previous recessions. While real GDP fell by 0.3% q-o-q in Q1 real gross domestic income rose by 0.5% q-o-q and was up 2.4% y-o-y – hardly a recession as far as income is concerned.
Drilling down to nominal (non-inflation adjusted) estimates, income-based GDP rose 0.8% q-o-q and 3.1% y-o-y. Some of this lift was down to higher income for exporters because of higher metal prices. Getting down to income more relevant to households, compensation of employees (including wages and Work-keeper payments) rose by 0.5% q-o-q and by 4.2% y-o-y, very respectable growth for an economy in recession.
The Australian economy is in recession evident in falling output, job losses and falling household spending. Household income, however, continues to rise, not fall as usually happens in recession assisted by massive government income support programs.
Most likely the support for household income will ensure greater upward momentum for the turn upwards in household spending that started mid-Q2. Measured Q2 GDP will still fall and by more than in Q1, but Q3 GDP is likely to show a sharp lift. The removal of various household income support programs in September threatens a renewed fall in household spending in Q4, but the threat can and probably will be eliminated if income support programs are removed in stages.
The current unusual recession with income rising increases the chance of a “V”-shaped recovery assuming a staged rather than abrupt halt to covid-19 income support programs. The other major factor that could halt a “V”-shaped recovery in its tracks is a substantial second wave of covid-19 infections requiring reversal of the process of removing economic restrictions. The likelihood of a second wave of infections is in the forecasting too hard basket. What we can see and assess on the economic front, however, is looking more promising.