Australia’s recovery out of its third worst downturn in history will rely on households and businesses spending almost $400 billion put away in savings through the pandemic as warnings grow interest rates may be pushed up faster than expected.
Treasurer Josh Frydenberg on Wednesday said the “damn lot” of money socked away by Australians was pivotal to the next 12 months as official figures showed the economy contracted by 1.9 per cent during the lockdown-plagued September quarter.
NSW, which was in various levels of lockdown through the entire three months period, bore the brunt of the downturn with the domestic state economy contracting by 6.5 per cent. NSW state final demand is now 2.9 per cent down on where it was in September 2019.
While Victoria and the ACT both went into lockdown during the quarter, they did not suffer the same hit as NSW. Victoria’s domestic economy shrank by 1.4 per cent to be 0.4 per cent smaller than two years ago while the ACT endured a 1.6 per cent hit.
The national economy is now 0.2 per cent smaller than it was at the end of 2019 with the September quarter only behind last year’s June quarter 6.8 per cent contraction and the June quarter of 1974 hit of 2 per cent.
Household spending sank during the quarter, stripping 2.4 percentage points from the overall result.
Across NSW, household spending fell by more than 10 per cent in the quarter or by $9.2 billion. The state was also hit by its shutdown of the construction sector, delivering a $6 billion hit to the economy.
Offsetting the drop in private spending was the public sector. Public demand added 0.7 percentage points to growth, with federal, state and local government spending all reaching record levels. Some of the extra expenditure was due to health-related programs dealing with the pandemic.
The fall in spending, combined with government assistance programs, meant household savings increased sharply. Since the pandemic started, households have saved at least $250 billion.
On top of up to $120 billion in cash sitting on business balance sheets, Mr Frydenberg said the high level of savings was a positive that meant the economy should grow strongly in coming quarters.
“This is money that will be spent across the economy as restrictions are eased and Australians go about their daily life. This is going to give our recovery momentum,” he said.
Bureau of statistics data showed the 1.9 per cent contraction was the largest of any major economy during the September quarter. The next largest was a 0.7 per cent hit to the economy of Japan.
Shadow treasurer Jim Chalmers said Australia was being left behind by the rest of the world.
“Of the 28 countries from the OECD which have reported their September quarter figures, Australia ranks dead last. Australia under Scott Morrison and Josh Frydenberg, in the September quarter, has the worst performing economy so far. The worst in the world,” he said.
ANZ senior economist Felicity Emmett said while the outbreak of the Omicron variant remained the largest uncertainty, the outlook remained positive.
“With household balance sheets in great shape, a large pipeline of residential and non-residential construction, and investment incentives helping to boost the capital expenditure outlook, the outlook for 2022 is very positive,” she said.
The figures came out ahead of a new report by the OECD into the global economy in which it forecast the Australian economy to expand by 4.1 per cent next year and then by 3 per cent in 2023.
It said one of the most significant risks to the Australian economy was the nation’s trade relations with China, noting tariffs and restrictions on Australian exports could be increased.
But it also noted the large level of household savings could deliver an unexpected boost to the economy over the coming year.
According to the OECD, stronger growth and higher inflation could force the Reserve Bank – which has said it will not increase official interest rates until 2024 – to move faster.
“The Reserve Bank of Australia should be vigilant about signs of rising inflation and may need to tighten monetary policy faster than it is currently anticipating,” it said.
The OECD also urged Mr Frydenberg, who is forecasting more than $330 billion in budget deficits over the next four years, should set “well-defined targets and timeframes” against which the government’s medium term fiscal plans could be measured.
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