Dr Brendan Rynne, KPMG Chief Economist’s forecasts for Q4 and the remainder of 2021 

  • GDP growth for Q4 – 2.3 percent
  • GDP back to pre-covid levels in second half of 2021
  • Consumption will rebound by $10bn in Q4 and drive growth
  • Imports will surge $7.5bn in Q4
  • Exports weaker due to China problems and higher dollar
  • Overall year-on year growth -2 percent December to December

Given last week’s stronger than expected capital expenditure figures, we are upgrading our forecasts for this week’s Q4 GDP figure to 2.3 percent. Business investment spending rose by 3 percent during the final quarter of 2020 – a pre-pandemic expected level of growth. We now anticipate year-on-year growth (Dec 2020 quarter compared to Dec 2019 quarter) to be -2 percent.

KPMG analysis has shown that the coronavirus pandemic dragged down private business investment by about 0.5 percent during the first 3 quarters of 2020.  So, if business sentiment had remained as negative as it had been during the depths of the pandemic in Australia, we should have seen private sector investment spending increase by only 2.5 percent for the final quarter of last year. But it seems many businesses have adopted a ‘let’s get on with it’ mentality and the vast majority of the capex spending increase was on plant and equipment.

The tax incentives offered by the Commonwealth Government for instant asset write-offs, combined with many businesses investing in new technologies to allow a more permanent ‘working-from-home’ solution for their workforce, are also likely to be key influences in the investment growth experienced in the December quarter.

The largest driver of growth over the quarter will be consumption expenditure, which is expected to have rebounded by nearly $10bn.  Investment, government spending and exports are all forecast to be contributors to growth for the quarter, up around $2bn, $3bn and $3.7bn respectively over the September 2020 levels.  However, the rebound in consumption and investment spending has also dragged up imports, which are expected to have increased by a whopping $7.5bn during the quarter, resulting in a net rise in GDP of about $10.5bn to $11bn.

KPMG’s short-term forecasts have Australia’s GDP returning to pre-pandemic levels in the second half of 2021, recognising that several countervailing forces will be playing out as the year progresses. While consumption and investment spending are likely to continue to improve, some moderation is expected as government support programs are withdrawn and businesses begin to stand on their own two feet again.

As transfers from the public sector to the private sector are wound back, the fall in government spending is not likely to be matched by a commensurate rise in taxation received by the government, meaning the net contribution by government to GDP is likely to be lower in the short to medium term.

KPMG are also anticipating a reversal of fortunes with Australia’s net exports, moving from a net surplus to a minor net deficit by the end of the year and this is expected to be maintained for the next few years. Several factors are influencing this outcome, including the escalating trade dispute with China, a rising Australian dollar, and an increase in investment activity (which requires the importation of specialist goods manufactured overseas).

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