Australian economy storms ahead as Covid-19 recovery turns ‘V-shaped’

Consumers are expected to drive growth in the current quarter. PHOTO: REUTERS

SYDNEY (REUTERS) - Australia's economy expanded at a much faster-than-expected pace in the final quarter of last year and all signs are that 2021 has started on a firm footing too helped by massive monetary and fiscal stimulus.

The economy accelerated 3.1 per cent in the three months to December, data from the Australian Bureau of Statistics (ABS) showed on Wednesday (March 3), higher than forecasts for a 2.5 per cent rise and follows an upwardly revised 3.4 per cent gain in the third quarter.

Despite the best ever back-to-back quarters of growth, annual output still shrank 1.1 per cent, underscoring the havoc wreaked by the coronavirus pandemic and suggesting policy support will still be needed for the A$2 trillion (S$2.08 trillion) economy.

The Australian dollar rose about 10 pips to a day's high of US$0.7836 after the data while bond futures nudged lower with the three-year contract implying an yield of around 0.3 per cent compared with the official cash rate of 0.1 per cent.

"The 'V-shaped' nature of the recovery is everywhere to see - economic growth, the job market, retail spending and the housing market," said Craig James, chief economist at CommSec. Mr James expects the economy to rebound 4.2 per cent in 2021.

Data on credit and debit card spending by major banks as well as official figures on retail sales, employment and building activity point to a strong start for this year.

Marcel Thieliant, economist at Capital Economics, expects GDP growth of 4.5 per cent in 2021, "which implies that allowing for the slump in net migration due to the closure of the border, the economy will suffer no permanent drop in output as a result of the pandemic."

Support Still Needed

Australia's economy has performed better than its rich-world peers thanks to very low community transmission of COVID-19 together with massive and timely fiscal and monetary stimulus.

Its economic output declined 2.5 per cent in 2020, far smaller than a 10 per cent drop in the UK, falls of 9 per cent in Italy, 5 per cent in Canada and more than 3 per cent in the US.

"Our economic recovery plan is working, and today's national accounts is a testament to that fact," Treasurer Josh Frydenberg said in a news conference. "The job is not done," he added.

"There are challenges ahead. But you wouldn't want to be in any other country but Australia as we begin 2021."

To help blunt the economic shock from the pandemic-driven shutdowns, the Reserve Bank of Australia (RBA) slashed interest rates three times last year to a record low 0.1 per cent and launched an unprecedented quantitative easing programme. The government announced a wage subsidy scheme to keep people in jobs while banks deferred payments on home loans and cut borrowing rates to help boost credit growth.

On Tuesday, the RBA re-committed to keep three-year yields at 0.1 per cent until its employment and inflation objectives are met, which policymakers don't expect until 2024 at the earliest.

Indeed, Wednesday's data showed there was barely any domestic-driven inflation in the economy with the biggest price rises coming from commodity exports.

The RBA has repeatedly said the unemployment rate must fall to around 4 per cent from above 6 per cent now to help drive wages growth above 3 per cent and for inflation to pop back into its 2-3 per cent target band.

"Stimulus and support measures are still very much required," CommSec's Mr James said. "Spare capacity will remain in the job market for a few more years, keeping the cash rate anchored at 0.1 per cent."

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