March 04, 2020 05:59:22
Australia’s economy is facing some of its biggest threats in a generation.
Economists’ forecasts for December quarter GDP growth range between zero and 0.4 percentage pointsConsumer spending declined in December and is expected to have remained low at the beginning of this yearAnalysts agree the risk of a recession is rising
This time last year the economy was already struggling. Business activity outside the mining sector was sluggish at best and shoppers were reluctant to spend at the stores.
Years of low wage growth, high levels of personal debt and job insecurity were already taking a toll.
Fast forward to the end of the year and add to that a severe drought, a disastrous bushfire season and rising unemployment, and you have an economy slowing down to a worryingly low pace.
That’s why when the threat of a pandemic hit global headlines, share markets sold off — companies looking for higher profits in a sluggish economy were forced to completely overhaul their earnings guidance.
Today’s GDP data won’t factor in the threat of the spread of the coronavirus and its impact on business and the economy, but it will highlight how vulnerable the economy was late last year before it was hit with the threat of a pandemic.
Let’s look at some of the key components of GDP leading into today’s national accounts release.
Australia relies heavily on international trade for economic growth.
According to the Bureau of Statistics, the current account surplus, seasonally adjusted, fell by 85 per cent to $955 million in the December quarter 2019.
This shows Australia’s trade position deteriorated materially towards the end of last year.
NAB’s chief economist Alan Oster told the ABC’s PM program this was a “reflection of lower commodities prices and lower demand for exports”.
Net exports and government spending were both expected to contribute less than expected to GDP in the December quarter, said AMP Capital’s chief economist Shane Oliver.
“Net exports and public demand [government spending] are each expected to contribute a smaller-than-expected 0.1 percentage points to December quarter GDP growth,” he said.
Shoppers and consumer spending generate the bulk of economic growth.
But Australian retail turnover fell 0.5 percentage points in December 2019.
This follows a rise of 1 per cent in November 2019, said Ben James, the director of Quarterly Economy Wide Surveys at the ABS.
“The December fall comes after a strong November, led by Black Friday sales,” he said.
The outlook for the first quarter of this year, according to economists, is for more tight purse strings.
Spending by businesses has also been lacklustre.
Businesses spending on equipment, plant and machinery rose 0.8 per cent in the December quarter.
Spending on new factories and building was quite poor though, down 5.9 per cent.
Businesses remain reluctant to spend and certainly do not possess the “animal spirits” the Reserve Bank governor, Philip Lowe said he wants to see.
Risk of recession
Ahead of the GDP announcement, three of Australia’s leading economists shared their views on where the economy was heading.
Mr Oster said the December quarter would see “moderate growth, but not great”.
He expected GDP growth to come in at a very modest 0.3 percentage points.
He said the economy should start to improve by April but “all our data suggests that things are getting worse”.
NAB said there was now an increased chance of a recession in 2020.
However, Mr Oliver was more pessimistic.
“We have revised down our December quarter GDP growth forecast to zero or 1.6 per cent year on year (from plus 0.3 quarter on quarter),” he wrote in a note.
“There is a risk that it could be negative, even before the bushfires and coronavirus likely knocked the economy backwards in the current quarter.”
This would mean, assuming the current quarter sees a contraction in economic growth, that Australia’s economy is currently in recession.
A technical recession is defined as two consecutive quarters of negative GDP growth.
Chances of a recession were increasing, according to BIS Oxford Economics chief economist Sarah Hunter.
“Definitely much higher now than they were two weeks ago,” she said.
“The probability of a recession this year is definitely higher and increasing as the [coronavirus] outbreak spreads to more parts of the world and doesn’t show any signs of slowing.”