Australia Economy Surges Into 2021 With Cashed Up Households

(Bloomberg) -- Australia's economy powered into 2021 on solid footings as households remain cashed up to consume and a pipeline of residential construction is established for the period ahead.

Gross domestic product jumped 3.1% in the final three months of last year from the prior quarter, when it rose an upwardly revised 3.4%, the Australian Bureau of Statistics said in Sydney Wednesday. That was the first back-to-back expansions above 3% since quarterly records were established in 1959.

The economy's V-shape recovery is coming into sharp relief as firms step up hiring, households unwind crisis-level savings and the property market gathers momentum. Still, there's a way to go yet as Australia will only return to its pre-pandemic level of GDP in the middle of this year, with the Reserve Bank of Australia saying monetary stimulus will be required for an extended period.

“Further reasonable growth figures seem probable as the household sector unwinds the large savings pool they accumulated during the pandemic,” said Rob Carnell, chief economist for Asia Pacific at ING Bank. “Continued vaccine rollout will also help this process to play out.”

The Australian dollar edged up immediately after the report and retraced gains to trade at 78.25 U.S. cents at 1:54 p.m. in Sydney.

The RBA is forecasting the economy will expand 3.5% over this year and next, continuing to be led by household spending. Meantime, government stimulus measures to encourage new home building and renovations have helped set up a pipeline of residential construction work for this year.

Today's report also showed:

• Household spending surged 4.3% from the prior quarter, adding 2.3 percentage points to GDP; government spending increased 0.8% Q/q, contributing 0.2 percentage point
• Residential construction climbed 4.1% from the third quarter, while machinery and equipment purchases surged 8.9%
• The savings rate slid to 12% from a revised 18.7% in the third quarter
• From a year earlier, the economy shrank 1.1%; economists had forecast a 1.9% contraction

A surging price of iron ore, Australia's largest export, providing a welcome windfall for the nation's budget. The bulk commodity has been hovering around $170 a ton and budget revenue assumptions were based on it returning to around $55 a ton this year.

Australia's unemployment rate has steadily fallen with the economy gathering strength, dropping to 6.4% in January from a pandemic peak of 7.5%. The government is due to end its signature wage subsidy program -- JobKeeper -- at the end of this month, creating pressure on jobs in industries like tourism that face an ongoing struggle from closed international borders.

What Bloomberg Economics Says...

“The economy has now recovered 85% of the virus hit. Private sector investment has to pick up pace to sustain overall growth beyond the boost from further activity normalization.”

-- James McIntyre, economist

For the full note, click here.

Snap Back

The two strong quarters of growth are a swing back from the nation's first recession -- defined locally as two consecutive quarters of contraction -- in 28-1/2 years in the first half of 2020. That record run included Australia avoiding slumps during the 1997 Asian Financial Crisis, the Dot-Com Bubble and the 2008 global financial crisis.

The government and central bank have worked closely to support the economy during the pandemic. The RBA's key role has been ensuring there was plenty of low-cost credit available and keeping down government borrowing costs.

The central bank's key interest rate and three-year yield target are at 0.10% and it's running a low-cost funding facility for banks. The central bank is also operating a A$200 billion ($156 billion) quantitative easing program targeting longer-dated securities that's designed to help keep a lid on the currency.

“Stimulus and support measures are still very much required, and any scale-back needs to be carefully managed,” said Craig James, chief economist at Commonwealth Bank of Australia's securities unit. “The Reserve Bank certainly hasn't changed its rhetoric. Rates will remain low for another three years. Bond buying will continue. Cheap loans will remain under offer to business.”

©2021 Bloomberg L.P.