Dr Brendan Rynne, KPMG Chief Economist, comments on the March quarter GDP figures
With growth of 1.8 percent for the first three months of 2021, the latest national accounts confirm that the recovery is continuing to power ahead, with quarterly economic activity in Australia now greater than it was prior to the onset of COVID-19.
Importantly, the statistics show that, as hoped for by the Government, the drivers of the economic growth are shifting away from COVID-19 related government support spending to additional expenditure by businesses and households.
Notably, investment spending plant and equipment by businesses grew 10.1 percent in the March quarter, the fastest quarterly growth since the December 2009. This additional investment spending generated more than 20 percent of all the incremental economic activity for the last quarter. Given previously soft private capex figures, this is especially welcome and the October Budget tax incentives, such as the temporary expensing of capital assets, seem to have had a positive effect
Also notable is that businesses directed their spending towards plant and equipment rather than towards bricks and mortar, suggesting the COVID-19-induced lockdowns has resulted in businesses looking to adopt different business models that involve more on-line activities rather than returning to offices and shop fronts.
The lift in residential construction activity as a result of the various fiscal stimulus packages, combined with the highly accommodative monetary policy settings, has resulted in the construction sector contributing more than 20 percent of the growth in economic activity for the quarter, followed by manufacturing and the transport, postal and warehousing sectors.
While households are still reasonably cautious about the immediate economic outlook – given they are saving slightly more than $1-in-every-$9 earned – they have also played an important role in the lifting of economic activity during the quarter with household consumption now back at levels similar to the start of the pandemic. The difference in this quarter is that 90 percent of the uplift in household spending was directed into restaurants, hotels, accommodation and recreation activities – services and experiences we cannot enjoy in lockdowns or with significant controls around physical distances.
Of the states and territories, Western Australia recorded the strongest lift in State Final Demand (SFD) growing 3 percent over the quarter, followed by Victoria at 2.3 percent. The fundamental difference between these two growth results is that Western Australia’s growth is being driven by business investment whereas Victoria’s was driven by household consumption, with spending on transport and restaurants, hotels and cafes both up by around 40 percent over the quarter as the local population spends on experiences following the previous extended lockdown in that state. The impact of the current lockdown will be seen in the June quarter’s figures.
As Australia’s market economy strengthens, we are also seeing a corresponding fall in public spending on social assistance. During the first quarter of 2021 this support spending fell by nearly 10 percent over the December quarter 2020 and is now just three-quarters of the level of personal benefit spending recorded at the height of the pandemic.
Encouragingly, gross valued added per hour worked, a proxy measure of productivity, has risen by 0.2 percent over the quarter and around 3 percent over the year, suggesting there has been a silver lining to this health crisis. We have become smarter at the way we work and are producing more from less, although the question remains how embedded these changes will be and whether in a post- COVID world we will return back to processes and procedures that have limited productivity growth from appearing.
The fact that significant capex is being directed towards new plant and equipment, helped substantially by government tax policy, allowing instant asset write-offs for many companies, suggests these productivity-enhancing activities may be here for the long run.