Australia GDP Falls Less Than Feared, Shows Signs of Resilience

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Australia's economy posted a smaller-than-forecast contraction, a result that's likely to reinforce views the Reserve Bank will taper or potentially even scrap its bond buying program early next year.

The economy shrank 1.9% last quarter, reflecting virus lockdowns across the heavily populated east coast, while beating an expected 2.7% drop as trade and fiscal stimulus helped cushion a slump in household spending. Gross domestic product rose an annual 3.9%, stronger than its pre-pandemic pace of around 2%.

The result is “much stronger and consistent with the resilience theme,” said Su-Lin Ong at Royal Bank of Canada. The data will give the RBA “confidence in progress toward its key goals as it navigates emerging omicron risk,” she added, referring to the latest variant of coronavirus.

The currency edged up following the data, as did benchmark bond yields.

Today's result will be a boost for the RBA, which is using record low interest rates to try to run the economy hot in order to return inflation sustainably to its 2-3% target. Fiscal policy played an important role in supporting the economy through the lockdown, with Wednesday's report showing public consumption jumped 3.6% to contribute 0.8 percentage point to GDP.

The RBA's board meets next week when it's widely expected to leave the cash rate at 0.1%. It will then hold a review of its A$4 billion ($2.9 billion) weekly bond buying program at its February meeting, the first of 2022. 

That comes against the backdrop of multiple data and surveys ranging from business confidence to retail sales, job vacancies and mobility pointing to a strong pick-up in activity. 

RBC's Ong expects an “accelerated taper” to A$2 billion a week at the February review, with a 30% probability of the program being halted altogether. “A lot clearly depends on how omicron plays out,” she said.

Today's data showed private consumption weighed heaviest on GDP, cutting a hefty 2.5 percentage points as Australians were stuck at home. 

What Bloomberg Economics Says...

“A slump in imports flattered the 3Q GDP. This boost will reverse over coming quarters as consumer spending rebounds from lockdowns -- causing an offsetting drag on GDP growth in the recovery phase.”

-- James McIntyre, economist. For full report, click here.

In a sign household spending is likely to rebound strongly, the data showed gross disposable income jumped 4.6%, the fastest rise since December 2008, helped by government support payments and share dividends.

The report also showed:

• Household spending in the lockdown states and territories of New South Wales, Victoria and the Australian Capital Territory fell 8.4%, compared with the other states which rose 0.7%
• The national household savings rate soared to 19.8% in the third quarter from 11.8% in the prior period
• Services consumption declined by less than some economists had feared. Household spending on services dropped 5.8%, led by falls in hotels, cafes and restaurants, recreation and culture and transport services
• Compensation of employees advanced by 0.5%, led by public sector increases

Even with the better-than-expected result, investors are nervous about the outlook for global growth with the shadow of coronavirus still lurking. 

“Uncertainty is again front of mind,” said Deloitte Access Economics Senior Economist Harry Murphy Cruise, referring to omicron. “That has the potential to see investments delayed and discretionary spending reined in.”

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