Finance Finance News ‘We are in a recession’: Why the June national accounts are the calm before the storm

‘We are in a recession’: Why the June national accounts are the calm before the storm

Economists said the June GDP result was the calm before the storm as Delta ravages NSW and Victoria. Photo: TND
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A COVID-zero honeymoon period earlier this year saved the Australian economy from going backwards as Delta descended on Sydney in June.

In what one leading economist called a “Byron Bay boom”, consumers flocked to tourism and hospitality in the June quarter, helping to add $3.3 billion to gross domestic product (GDP), the ABS said on Wednesday.

The 0.7 per cent quarterly expansion left Australia’s economy 1.6 per cent larger than before COVID plunged us into a recession last year.

But economists said on Wednesday that Australia had already fallen into another recession, amid new extended lockdowns in NSW and Victoria.

They said the June quarter data failed to capture thousands of job losses and consumers avoiding the shops as the Delta variant brought a months-long streak of zero COVID cases to a grim end in July.

And the outbreaks have only worsened since then, meaning much of Australia’s earlier economic recovery will be erased in the coming September quarter.

“We are in a recession now,” economist Saul Eslake told The New Daily.

The Byron Bay boom

The June quarter GDP data gives us reason to be optimistic, though.

It showed that consumers are more than willing to drive the economic recovery when COVID is under control, as it was during April and May.

Household spending rose 1.1 per cent in the June quarter, driving most of the overall GDP increase thanks to a boom in tourism and hospitality.

Spending on services rose 1.3 per cent, including a massive 25 per cent rise in transport services – a category that covers air travel.

EY chief economist Jo Masters said a “Byron Bay boom” had occurred.

“When Australian households and businesses think COVID-19 is under control, they’re confident to spend more,” Ms Masters said.

“After 18 months of being home, Australians’ love of travel was clear.”

Government spending drove much of that renewed confidence, with public investment rising 7.4 per cent in June to the highest level on record.

The Morrison government’s half-priced air tickets are one example of this.

They kicked off during the June quarter and covered Byron Bay and more than a dozen other tourism hotspots across the country.

Double-dip recession already here

The consumer-led recovery is misleading, however. For the June data is backwards looking.

Since then, Australia has endured a health crisis marked by far higher caseloads than during the first wave of COVID last year.

Extended lockdowns in NSW and Victoria will last until vaccination rates exceed 70 per cent at a minimum, according to current national plans.

This will cost tens of thousands of jobs and prevent consumers from going out and spending in the ways seen during the June quarter.

Much less travel is going on right now, as Qantas’ stand-downs show.

The lockdowns have led some economists to declare that Australia is already in recession, even though this is often defined as two straight quarters of negative GDP growth – something Australia will likely avoid.

Indeed APAC economist Callam Pickering said this technical definition of a recession is “silly” during a pandemic and should be largely ignored.

To make his point, Mr Pickering said a technical recession would have been declared if the economy had contracted by just 0.5 per cent over two consecutive quarters.

Instead, the economy is expected to contract by a massive 3 to 5 per cent in the September quarter – far worse than 0.5 per cent over two.

But because this massive contraction will occur in just one quarter, the country will avoid being tarred with the ‘r-word’ for the second time in just 18 months.

“This is a highly unusual set of circumstances,” Mr Pickering said.

“We need to adjust the traditional way we measure recessions.”

Mr Eslake said the technical definition of a recession was created in the 1970s by US-based labour market statisticians and shouldn’t dictate how we think about a health crisis 50 years later.

“It’s a silly and lazy rule,” Mr Eslake said.

“A much better rule is that a recession is when unemployment rises by 1.5 per cent or more within 12 months or less.”

If this definition is applied to the effective unemployment rate, then the Australian economy fell into recession during July, Mr Eslake said.

On current Commonwealth Bank forecasts, the Australian economy will be about $10.7 billion smaller in September than before the pandemic.

Will the rebound return?

Economists are now focused on what will happen to jobs and consumer spending under current national plans to ease lockdowns by December.

Victorian Premier Daniel Andrews unveiled plans on Wednesday to ease the state’s extended lockdown when vaccination rates rise above 70 per cent.

The plan largely mirrors that of the NSW government.

But unlike with previous reopening plans, the next round is expected to begin before COVID cases have returned close to zero.

A key question is whether consumers will head to the shops and go on holidays like they did during the June quarter when the risk of catching COVID-19 is much higher than it previously was, despite vaccinations.

Mr Pickering said the economic recovery is likely to be a bumpy one.

“What we’ve seen in countries that haven’t had strict lockdowns is that economic activity is hampered,” he explained.

“If going to a restaurant is a health risk, people might choose not to go out.”

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