Australian quarterly GDP growth readings are likely to be all over the shop through 2020 ranging on our latest forecasts from -0.3% q-o-q, or worse for Q1 to perhaps +1.0% q-o-q or higher for Q3. Quarterly GDP growth through 2019 was stable by comparison averaging +0.5% per quarter (assuming Q4 GDP due out early next month is close to our forecast +0.5% q-o-q) and tracked a narrow range between +0.4% q-o-q and +0.6% q-o-q.
In 2019 relatively stable quarterly GDP growth around a +0.5% q-o-q average implied a gradual improvement in annual GDP growth to +2.0% presenting a report card for the economy of “doing OK but could do better”. The RBA delivered three rate cuts in mid-2019 and at the same time households received a tax cut as well. By late 2019 there were signs that lower interest rates were adding momentum to a lift in home buying activity that was already underway at the time of the first RBA rate cut in June. There were also the first signs of stronger retail spending late in 2019 coming from the tax-cut boost to household disposable income.
More impact from the mid-2019 stimulus from lower interest rates and the tax cut will flow through to spending in 2020 but in Q1 the positive impact on GDP growth will be more than offset by the hit to the economy from the extensive bush-fires and corona-virus impact on various parts of the Australian economy including education, tourism and exports and imports more generally.
Our forecast for Q1 GDP starts with what it would have looked like in the absence of an abnormally severe bush-fire season and without the corona-virus outbreak. With falling unemployment late in 2019 and better household spending conditions assisted by lower interest rates and the earlier tax cut Q1 2020 GDP was on track to make around +0.6% q-o-q.
It is hard to estimate accurately the loss of spending in the Australian economy from the bush-fires and corona-virus but direct losses to tourism and education services would be at least $1.5 billion in Q1, plus as much again in goods export disruption and perhaps another $1 billion spending loss from irrational fears about corona-virus and people being more cautious about their daily activities. A loss of around $4 billion in Q1 translates to 0.9 percentage points detraction from GDP taking our Q1 GDP growth forecast down from +0.6% q-o-q to -0.3% q-o-q.
Turning to Q2 2020, again a reasonable GDP forecast absent abnormal bush-fires and corona-virus would have been +0.6% q-o-q or possibly +0.7%. GDP growth would have been gathering pace slowly helped by housing recovery and earlier policy stimulus. Bush-fires are unlikely to be detracting from spending in Q2. Most likely unusually heavy rain in Eastern Australia in early February brought an early end to the bush-fire season. Extensive Government payments to assist bush-fire recovery will be starting to impact in Q2 and will have a much sharper positive impact on spending and GDP growth in Q3 and beyond.
Detraction to spending from corona-virus may extend into Q2 although it is reasonable to assume that bans on inbound non-Australian travellers from China will be lifted in Q2. There will still be detraction from GDP growth in Q2 but less than in Q1. Our estimate is that detraction from GDP growth will be around half the detraction in Q1 taking the GDP forecast from +0.6% or +0.7% q-o-q ex-bush-fire and corona-virus impacts to +0.2%.
By Q3 2020 it is highly likely that recovery spending after the bush-fires and containment of corona-virus will be in full swing. Spending will be lifting from a crisis-affected low base in Q1 and Q2, possibly with the assistance of more policy stimulus. It is reasonable to expect GDP to lift at least 1.0% q-o-q in Q3 and possibly even more strongly in Q4.
These large changes in quarterly GDP growth in 2020 play havoc with year-on-year GDP growth running down from about +2.0% y-o-y in Q4 2019 to +0.8% y-o-y or less in Q2 2020 and pushing up sharply to +2.1% y-o-y or more in Q4 2020. One issue is how should the RBA respond with monetary policy in this volatile growth period?
If the dip in annual GDP growth looks like being temporary with confidence of a “V” shaped post-disaster recovery in growth in the second half – much as described above – the RBA should do nothing and leave the cash rate unchanged at 0.75% throughout 2020.
The best indicator helping to determine the extent and duration of the GDP growth dip in 2020 is the health or otherwise of the labour market. Any material lift in the unemployment rate could promote a self-feeding cycle of weaker economic growth causing the first-half 2020 dip in GDP growth to run deeper and longer.
In late 2019 the monthly labour force reports for November and December were both better than expected causing the unemployment rate to decline to 5.1%. Most likely employment growth will be softer in January (data release later this week) and February with a small rise in the unemployment rate. If the unemployment rate rises to no more than 5.3% (the peak rate in 2019) in the first few months of 2020, the RBA will probably leave the cash rate unchanged, our base forecast at this stage.
If, however, unemployment rises more sharply towards 5.5% threatening to deepen and lengthen the bush-fire/corona-virus GDP growth dip the RBA will respond with more cash rate cuts.