Folks, these are scary times. So I give you the following seven reasons why you do not need to add to your list of worries the fact that Australia has just clocked up its sharpest decline in economic output on record.
1. It’s old news. The national accounts figures released on Wednesday refer to the value of goods and services produced in the months of April, May and June this year, when severe coronavirus restrictions were in place across the nation. It is entirely predictable those restrictions would mean that Australians were able to produce and sell a lot fewer goods and services during that period.
2. The figures are much better than originally feared. Until quite recently, both Treasury and the Reserve Bank had been anticipating a fall in gross domestic product (GDP) in the June quarter of about 10 per cent. It didn’t happen. It was only 7 per cent. That’s good news.
3. We have done much better than other countries. Britain saw its economic output shrink by more than 20 per cent. The European nations contracted, on average, by about 12 per cent and the United States by close to 10 per cent.
4. It’s nonsense to say that economies have “suffered” in some way, as many are claiming. By now, I’m sure you’ve seen news reports stating the Australian economy has “suffered” or “experienced” its biggest decline in GDP on record. But think about it. Economies don’t suffer: people do.
Granted, economies are, ultimately, just collections of people. But just because the value of goods and services produced by the people in one period compared to another has shrunk, it does not necessarily imply that those people have suffered. Yes, some have. But others have quite enjoyed staying at home and others have enjoyed a pay increase during COVID-19, thanks to generous government support.
5. Despite the gloomy headlines, the figures reveal some good news. The most important being that total household income actually increased during the quarter. That’s right. While economic output was down, household gross disposable income rose 2.2 per cent in the quarter.
Why? Because while wages fell, the total flow of income to households was bolstered by JobKeeper payments, a $550 boost to JobSeeker and the $750 economic support payment. And the bureau’s figure, by its own admission, doesn’t include the additional boost to household budgets from the early release of super, rental deferrals and other supplementary relief measures, including loan deferrals.
6. Aussies have just amassed their biggest quarterly savings buffer since the mid-1970s, according to these figures. It’s counter-intuitive, I know. During recessions, people lose their jobs and are generally required to draw down on their savings. But not this time. Not only have government income transfers boosted household incomes, but restrictions have meant we couldn’t spend as much. Household spending fell about 12 per cent in the quarter. And if your income goes up and your spending goes down, your savings rise.
Indeed, according to the bureau’s tally, the level of Australian household net savings was $42 billion higher in the June quarter than in the March quarter. This is the direct result of a $7 billion increase in household income and a $35 billion decrease in household spending.
Put another way, instead of saving about five cents in every incoming dollar, as we were doing before the crisis hit, Aussie households saved, on average, 20 cents in every incoming dollar during the June quarter. This is a substantial buffer that will stand us in good stead in the difficult months to come.
7. This recession is different, mostly because governments have finally learnt the lesson of every other recession. Namely, that it is the job of government to step in and smooth the cycle. Unlike the 1990s recession when support came too late, or even the Great Depression when austerity was implemented, Australia’s government today has unleashed unprecedented support and stands prepared to do more.
JobKeeper payments have been extended, albeit at a reduced rate, and the Treasurer, Josh Frydenberg, is preparing to announce further support for the economy in the budget next month. A bringing forward of tax cuts slated for mid-2022, which would increase the thresholds of the 19 cent and 32.5 cent tax brackets, is on the table. As it should be.
Because if there’s a lesson from this week’s national accounts, it’s the surprising comparative weakness in Australian household spending. While our total economic output shrank less than in France, Germany, Japan and the United States, the contraction in our household spending was even more severe than those countries.
If you are concerned about your accounts due to COVID-19 and would like to discuss please contact our office.