How bad was the second quarter GDP contraction?

Australia’s June quarter GDP figures will be published on the 2nd of September and they are expected to confirm a substantial deterioration of the economy. The RBA suggests that “the decline in Australia’s economic activity in the June quarter is expected to be the largest in the history of the quarterly national accounts.”

Last week the UK Office for National Statistics released their GDP data indicating that British GDP contracted 20.4% in the second quarter, the steepest decline on record, pushing Britain’s economy into the deepest recession of any global economy. In comparison with other advanced countries, this decline is roughly double that of Germany and the US. The Office for National Statistics suggests that the larger contraction of the UK economy reflects how lockdown measures have been in place for a larger part of this period in the UK.

The UK finance minister Rishi Sunak stated that the UK economy has been hit particularly hard due to its reliance on services which make up four-fifths of the UK economy, and social consumption such as eating and shopping. According to the trade association UKHospitality, the hospitality sector, which accounts for around 5% of UK GDP, has been hit the hardest. Furthermore, the UK economy relies on household spending and services which both declined significantly as consumers saved more and millions of workers lost their jobs.

Different countries have different experiences with the pandemic, which shape both initial contractions and subsequent recoveries. In Australia, we saw economic growth shrink by 0.3 per cent in the March quarter. However, Federal Treasurer, Josh Frydenberg has indicated that “the June quarterly GDP figures will more fully reflect the coronavirus pandemic and associated shutdowns which began in March.” He also stated that “the economic impact in June will be severe, far worse than what we have seen in March.”  Melbourne’s recent stage four lockdown and subsequent border closures are also likely to prolong the recession and reduce hopes for a rapid economic rebound.

The Australian economy was expected to shrink by 0.25 per cent in 2019-20 and 2.5 in the current financial year, prior to the outbreak in Victoria and subsequent restrictions. According to the Australian Government Economic and Fiscal Update published last month, “in the June quarter, the economy is expected to have experienced its largest quarterly fall on record of 7 per cent.” This is due to the fallout from restrictions which has been evident in all parts of the economy since March.

The RBA’s August Monetary Policy Statement predicts GDP is expected to contract by around 6 per cent over the year to December 2020 but then grow by around 5 per cent over 2021. The RBA believes the June quarterly economic figures will indicate a deep decline in economic growth and according to the Australian Financial Review, most economists expect growth in the June quarter to be negative. The RBA has previously forecast an 8 per cent fall in early May, but they now expect the Australian economy to have shrunk 6 per cent over the year to June.  This is a result of domestic output and employment falling significantly. The RBA wrote that “the peak-to-trough decline in GDP is expected to be around 10 per cent, mostly concentrated in the June quarter.”

In the RBA’s Statement on Monetary Policy released in May, the June quarter will be shaped by the extent to which social activity and the labour market continue to be restricted. The RBA suggest a baseline scenario in which we will see a very large contraction in GDP for both the March and June quarters.

Earlier this month, Westpac chief economist Bill Evans told Shane Wright from Fairfax Media that in the September quarter, the Victorian economy would likely contract by 9 per cent, offsetting 2 per cent growth in NSW and a combined 3 per cent from Queensland, South Australia, Tasmania and the Northern Territory (see Melbourne lockdown could ruin September economic bounce). According to Evans, the Australian economy is likely to experience three consecutive quarters of near-zero or negative economic growth leaving the economy operating well below capacity at the end of the year. However, Evans says that “despite the fiscal cliff in the December quarter the economy will recover by 2.8 per cent in the December quarter.”

Overall, it is expected that Australian GDP fell sharply by 7 per cent in the June quarter, making it the largest quarterly decline on record. The economy will struggle to grow in the September quarter owing to the Victorian outbreak, but hopefully will experience positive growth in the December quarter and beyond.

This article was prepared by Adept Economics Research Assistant Taylor-Rose Hull and Director Gene Tunny. For further information please get in touch with us on 07 3085 7417.

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