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BOOM TO GLOOM: What’s next for the Aussie economy?

Australian $100 note with Sir John Monash wearing computer-generated COVID-19 face mask.
Australia's economic growth is in clear danger. Here's why. (Image: Getty).

The economic facts are there for all to see.

Before the extensive lockdowns across much of Australia were implemented in June, July and then August, the economy was slowing.

It is not that it was falling into a deep hole but GDP growth, which is the broadest measure of economic performance, slowed to 0.7 per cent in the June quarter and this followed growth of 1.9 per cent in the March quarter and 3.2 per cent in the December quarter 2020.

The result was a little above expectations but signals a cooling in the economy just before the major COVID lockdowns were implemented throughout NSW, Victoria and the ACT which are widely expected to see a huge fall in GDP in the September quarter.

In terms of the June quarter GDP result, there were mixed messages.

In trend terms, which points to economic momentum over the last few quarters, there was good news in the growth in household consumption, public consumption and investment, business investment was strong, while net exports continued to detract from GDP as did the accumulation of inventories.

For the June quarter, all of the 0.7 per cent growth was accounted for by government demand which coincidently contributed 0.7 percentage points to growth.

This is yet another example, if any were needed, about the potency of government in underpinning economic activity.

The household sector is in good shape.

While savings levels edged lower in the June quarter, they remain high compared to the average of the past few decades.

Debt servicing costs, or the amount of interest householders are paying on their debt, is near 30 year lows, a fact that is freeing up cash flow for spending elsewhere in the economy.

At the same time, with house prices and the stock market rising at an unrelenting rate, there is a powerful wealth effect that will support confidence and purchasing power, especially when the current round of lockdowns are eased.

The solid growth in GDP through to the end of June fits perfectly with the strength in the labour force data to that point.

Recall the surge in employment and the sharp falls recoded in the unemployment and underemployment rates, both of which were at decade lows in June.

The economy was on track to deliver a 4.5 per cent unemployment rate by the end of 2021 and a 4 per cent rate during 2022.

This tightening in the labour market was expected to underpin a lift in wages growth and inflation, both important objectives of the RBA and its monetary policy stance.

Unfortunately, the scarcity of vaccinations and resultant outbreak of COVID which sparked the lockdowns in NSW, Victoria and the ACT will undermine and reverse this economic progress.

Where to from here?

All eyes are now on the GDP result for the September quarter.

What sort of economic downturn will there be?

What sort of recovery is likely?

What damage or legacy from that downturn will there be when a significant proportion of the population is vaccinated and lockdowns are significantly eased?

The answers will determine what policy response will be needed to lift the economy on to the strong growth path in 2022.

Based on the 2020 experience of lockdowns, GDP is likely to fall by close to 4 per cent in the September quarter with the unemployment rate set to spike towards 6 per cent by the end of 2021.

The economy has gone from boom to gloom simply because the government failed to get enough vaccinations.

It is a great shame when, but a few months ago, the economy was in sparkling form.

There will be a recovery but the return to solid growth remains problematic, especially with commodity prices falling, the housing market poised to slow and with population growth still close to zero.

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