Dr Brendan Rynne, KPMG Chief Economist, responds to March quarter accounts
The March figures are better than we had expected, and although for the June quarter we expect an 8 percent fall in GDP – given the wholesale shutdown in the economy – we are more optimistic than some for the overall 2020 forecast.
Our central case is for a GDP hit closer to 3.5 percent than the 6 percent-plus hit that other analysts suggested. With the government support packages the labour market has stood up better than expected and the stock market has now rebounded 30 percent off its lows.
Any forecasts made in a period of such volatility has a wide band of uncertainty – our assessment is that some of the bad news built into our March forecast will be realised in the June quarter.
For the March quarter, most of the components of GDP show a decline. The biggest contributor to this is the fall in private sector investment, firstly during the bushfires in January and February and then the virus in March.
Even here though the figures are not as gloomy as we had feared. Housing investment held up relatively well – and while overall private business investment declined by less than the survey of new capex had previously suggested, it should also be remembered that investment only represents about 20 percent of GDP.
Consumption was also down 1.3 percent q/q and 0.5 percent y/y though retail had a real boost in March, compared to previous two months, with all the panic buying.
Government expenditure was stronger than expected, with state government public corporation spend up 15 percent – probably reflecting work done around the bushfires. The reduction in domestic demand has also resulted in a significant drop in imports, but exports held up reasonably well with net exports contributing +$11bn to GDP (up from +7.5bn in 2019Q4)
It is important that the authorities keep focusing on minimising the damage to the economy while keeping the pandemic under control and looking to boost productivity through reforms for the long-term. While the government should not worry unduly about repaying the JobKeeper debts too quickly, in an era of ultra-low interest rates, it also has to balance the interests of all citizens. Over-extending on the stimulus component of the recovery by investing in activities with low long term payoffs and over-borrowing from the future is a risk and could cruel the economy further down the track.
Of course next quarter will reveal the full extent of COVID-19’s initial impact on the economy but the March quarter figures, together with other partial indicators, suggest there is a cause for optimism and the June numbers will not be as grim as some analysts are expecting.
Assuming there is no set-back on the pandemic, the economy has been resilient and the path to recovery may be less painful than we all thought only a month ago.