After the shock of the 7.0% q-o-q GDP fall in Q2, the chances of a widely forecast third consecutive quarterly GDP fall in Q3 are receding. The economy is showing resilience, notwithstanding the economic damage from the late-July imposition of stage 3/4 lock-downs in regional Victoria and Melbourne weighing on a quarter of the national economy.

Resilience early in Q3 is showing across several key economic indicators. Retail sales rose to a record high in July and were up 3.2% m-o-m and 12.0% compared to July 2019. Victorian retail sales were weaker in July, down by 2.1% m-o-m, but that fall was overwhelmed by increases everywhere else and with particularly strong increases in New South Wales, up 5.9% m-o-m; Queensland, 5.0%; and the ACT, 5.8%. The latest Westpac Consumer Sentiment Survey reading for September conducted more than a month into the Victorian lock-downs rose 18% m-o-m, a sign that much of the country remains in a mood to spend if it can.

Housing activity is also showing signs of strength. The value of new home loan commitments rose in July by 8.9% m-o-m (investor home loan commitments up 3.5% m-o-m and owner-occupier home loans up 10.7%). The rise in owner-occupier home loans was the largest month-on-month increase on record. Victoria shared in the strong rise in owner-occupier home loans with a rise of 8.9% m-o-m in July, reflecting according to the ABS analysis the period of eased Covid-19-related restrictions prior to restrictions tightening again from later in July.

Undoubtedly housing finance activity will have been weaker in Victoria in August, but there is a good chance that weakness will have been offset by strength elsewhere around the country. While home auction numbers and clearance rates have plummeted to very low levels in Melbourne for example, they have risen sharply in Sydney over recent weeks topping 70% clearance rate at the weekend.

Home building approvals were also surprisingly strong in July, up 12.0% m-o-m (private sector houses up 8.5% m-o-m, private sector dwellings excluding houses up 22.7%) although were mixed around the country ranging from a fall of 10.5% in Western Australia to huge increases of 32.0% in New South Wales and 50.0% in Tasmania.

The strength showing in July retail sales and housing activity reflect several factors but perhaps the key ones were strong growth in household disposable income; the relaxation of Covid-19 restrictions allowing people to go out and spend; and spending to compensate for areas where spending was still not possible such as overseas travel.

In Q2, household disposable income rose by 2.2% q-o-q, an unusually large quarterly rise bolstered by a 41.6% q-o-q lift in social assistance payments plus the Job Keeper payments boosting cash-flow for employers and contributing to employee compensation.

In the first part of Q2 the entire country was under Covid-19 restriction meaning that while household income was well-supported opportunities to spend were in some cases closed, especially on some types of services such as travel. Household consumption spending fell in Q2 12.1% q-o-q in real terms, the biggest quarterly fall on record. The biggest part of the fall in household consumption was on services, down 17.6% q-o-q and of that component the biggest falls were in transport services, -88.2% q-o-q and accommodation services, -77.5% q-o-q.

The corollary of households receiving a big income boost in Q2 but spending much less was that the household savings ratio jumped from 6.0% of household disposable income in Q1 to 19.8% in Q2, the highest reading since Q2 1974. Australian households were poised at the end of Q2 with the wherewithal to spend up a storm from accumulated savings providing opportunities to spend were opening and they were confident enough that their income would remain supported.

Recent economic readings relating to July retail spending and housing activity indicate that households are starting to spend freely. The set-back from renewed Covid-19 restrictions in Victoria from late-July will temper the rebound in spending elsewhere in Australia but probably will not destroy it.

Bigger risks to the rebound in spending occur at the end of this month when the Government starts to taper income support programs and with the ending of the holiday on home loan repayments by the banks. The current run of surprisingly strong economic readings could end. The risk is that stronger-than-expected Q3 GDP growth could turn to weakness again in Q4. However, it is worth keeping in mind that the resilience in recent economic readings has surprised all analysts.

What is certain is that the RBA will be taking no chances given the downside risks to the economy just poking up its head from the deepest recession since the 1930s. The RBA will be keeping monetary conditions very easy until it is convinced the economy has chewed up excess capacity and is growing at a pace pushing up annual inflation well above 2% y-o-y. Even with a few upside surprises in the economic recovery such as may be occurring the RBA is unlikely to touch the monetary before 2023 at earliest.