The Australian economy shrank 1.9 per cent in the September quarter as lockdowns forced consumers to stay home instead of spending at local restaurants, cafes, and shopping centres.
Australian Bureau of Statistics (ABS) data published on Wednesday showed the economy is slightly smaller than it was before the pandemic but weathered this year’s lockdowns better than expected.
And while Omicron has economists and health experts worried about the future, the good news is shoppers are ready to spend big on presents and social events during Christmas, with disposable income rising at the fastest pace in more than 13 years.
“Households have a lot of money to reinsert into the economy over the next three to six months,” APAC Indeed economist Callam Pickering said.
“It looks as though it’s going to be a big Christmas spending season.”
Why the Australian economy shrank
Gross Domestic Product (GDP) fell 1.9 per cent over the September quarter.
The contraction was expected because of lockdowns in Victoria, the ACT and New South Wales.
But economists were anticipating an even larger fall of close to 3 per cent, so Wednesday’s data was a relief – partly because Victoria performed better than expected.
The Victorian economy shrank by 1.4 per cent over the quarter, much less than NSW’s, which saw its GDP decline by a whopping 6.5 per cent.
“Businesses have probably learned a bit [about lockdown],” Mr Pickering said.
“That’s one of the reasons why the overall impact across NSW and Victoria hasn’t been as big as it was during lockdowns last year.”
Still, the national decline is the third-largest quarterly GDP fall on record, and was largely driven by a huge 4.8 per cent fall in household consumption.
Consumer spending accounts for about two-thirds of the Australian economy, so when shoppers are stuck at home and can’t spend, growth grinds to a halt.
The consumption decline was particularly large in services sectors like hotels, cafes and restaurants, which together fell by 5.8 per cent.
Independent economist Saul Eslake said the September-quarter GDP fall was bigger than the cumulative contraction during Australia’s 1990s recession.
“Though less than expected, the [GDP] fall doesn’t detract from my previous assertion that it was a recession,” he said.
Gearing up for a merry Christmas
The good news is that households were also earning more money while at home thanks to billions of dollars in government income support.
Household disposable income rose 4.6 per cent over the quarter, which was the fastest growth rate since the Global Financial Crisis in 2008.
That drove a big spike in the household savings ratio during lockdown.
The household savings rate rose from 11.8 per cent to 19.8 per cent, which means Australians have socked away tens of billions of dollars.
It all points to a merry Christmas for the economy, because experts expect households to spend much of this money over the holiday period.
“This strength shows in the fact that we’ll only need 2 per cent growth in the December quarter to get the economy back to pre-Delta levels,” EY chief economist Jo Masters said.
The Omicron grinch?
There is of course a massive caveat to the better-than-expected outlook for the Australian economy – the Omicron variant.
We don’t yet know enough about how the latest iteration of the coronavirus will influence health policy and therefore affect the economic recovery.
But there is a risk that Omicron could spoil the Christmas period if health officials are forced to reinstate restrictions on business and movement.
“We need scientists to do their work to figure out what the variant means in terms of vaccine efficacy, transmissibility and how severe the disease is once you catch it,” Dr Sarah Hunter, chief economist of BIS Oxford Economics, said.
“A combination of those three things are really going to dictate how worried we need to be.”
An election in the wings
There’s also a federal election due within the next six months, preceded by a pre-budget statement in December and a full budget in March.
Election years usually spur increased government spending, which may help boost the economic recovery, but the government has yet to make public its policy intentions.
Mr Pickering said although the time for economy-wide support is probably over, there’s still a case to be made for more targeted spending.
“We need to remember the impact of COVID has been uneven,” he said.
“There are groups within society that are doing it tough and it makes sense to target these groups for additional support.”
Treasurer Josh Frydenberg confirmed on Wednesday that the mid-year budget review will be held on December 16.
In a statement on Thursday, shadow treasurer Jim Chalmers said the September-quarter fall in GDP was a decline the Australian economy “didn’t need to have”.
“Of the 28 countries that have released their data for the last quarter so far, Australia under the Liberals and Nationals is dead-last,” he said.
“Billions of dollars a week wouldn’t have been bleeding from the national economy were it not for the lockdowns made necessary by Scott Morrison’s failures on quarantine, vaccines and economic support.”