INSIGHTS BLOG

GDP HAS HELD UP BETTER THAN EXPECTED, BUT THERE IS A LONG SLOG AHEAD

Mark Lister, 18 September 2020

We’ve seen two important economic releases during the last few days, one which confirms just how hard the COVID-19 level four lockdown hit us, and another that provides some confronting insights into the long slog that lies ahead.

Thursday saw the release of the June quarter gross domestic product (GDP) report.

In short, GDP measures the value of all the finished goods and services produced in an economy over a particular period. While it is far from perfect, it serves as a reasonable scorecard for which to judge our economic health.

In the three months to the end of June, the economy contracted by 12.2 per cent. That's the worst quarterly decline on record.

However, it wasn’t quite as bad as the 12.5 per cent fall that was expected, and it was also a marked improvement on the 18.4 per cent collapse that economists had pencilled in three months ago.

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The industries hit hardest were those most impacted by the lockdown and travel bans, such as retail, accommodation and restaurants, and transport.

When compared with other countries around the world, our decline is at the more severe end of the spectrum.

The UK suffered a much bigger drop of 20.4 per cent during the June quarter, although Australia (-7.0), Japan (-7.9), the United States (-9.1) and Canada (-11.5) all held up better than us.

This is understandable, given we started the June quarter in level 4, before moving to level 3 near the end of April, then to level 2 in mid-May, and finally back to level 1 on Monday 8 June. The borders were closed for the entire quarter.

Time will tell if this harsher approach in the early days has paid dividends in the following period. The next GDP report is due just before Christmas, and it is expected to reflect a strong rebound that is also likely to break records.

However, that certainly won’t take us back to where we were before. In fact, most forecasts suggest it will be late 2022 before the economy gets back to pre-COVID levels.

A day before the GDP report came out, the Pre-Election Economic and Fiscal Update (PREFU) was published by the Treasury.

Treasury releases forecasts for the Government’s finances and the economy twice a year, and in an election year this report must be released between 20 and 30 working days before the election.

This PREFU was originally scheduled for release last month, but it was delayed along with the election, to ensure all political parties, as well as voters, are fully informed regarding the state of the national accounts.

Like the GDP report, it reflected a bleak economic backdrop, albeit one that was an improvement on what we saw at the Budget in May.

Looking ahead, Treasury forecasts suggest the economy won’t suffer as much as previously thought over the next year or two, but beyond that the rebound is expected to be a longer haul.

Unemployment is forecast to peak in 2020 at 7.7 per cent rather than 8.3 per cent, but in four years’ time it will still be stubbornly sitting at 5.3 per cent.

Treasury expects Government debt to rise to 55.3 per cent of GDP in 2024, slightly higher than May estimates suggested. As we have noted in the past, at some point we will have to ask some difficult questions about reducing this debt burden.

These two releases told us a few things we already knew, notably that the economy took a hammering in the June quarter as many businesses ground to a halt amid the lockdowns.

The more relevant issue is whether we will reap the rewards of the “go hard, go early” approach in the months ahead, and what the recovery will look like.

Forecasts are nothing more than educated guesses, even for a well-resourced organisation like the Treasury. However, they paint a sobering picture of just how much of an uphill battle the next few years could be.