East coast lockdown likely sent Australian economy to second-biggest slump

Australia’s economy probably posted its second-largest contraction on record as businesses were forced to shutter and States sealed borders to try to contain a raging outbreak of the Delta variant of coronavirus.

Gross domestic product likely fell 2.5 per cent in the June-to-September period from the prior quarter, economists predicted ahead of government data Wednesday.

That would be the biggest fall since a 7 per cent decline in April-to-June 2020, meaning the nation’s two worst quarters occurred during the pandemic.

Australia’s central bank has signalled a weak result will only be a “setback” and remains optimistic that “a swift rebound in economic activity” is likely, TD Securities said.

For the outlook, much will depend on the omicron variant of coronavirus.

Here are three things to watch for in third-quarter GDP beyond the headlines:

Income and savings

Massive fiscal support to keep households and firms solvent during the lockdown is likely to have boosted incomes.

In addition, with Australians stuck at home and unable to spend on big-ticket items like foreign travel, the savings rate probably jumped again, leaving consumers cashed up to fuel the recovery.

Services spending

Economists struggle to gain a handle on services demand as monthly retail sales data primarily covers goods.

The GDP report will show just how hard services were hit by restrictions that prevented large parts of the east coast from eating out, attending sporting and entertainment events or going to hairdressers, nail spas and gyms.

While consumers were largely still able to buy goods online, the services economy likely came to a screeching halt.

Labor costs

The GDP report’s Compensation of Employees will probably reinforce existing signals in the economy that price pressures remain weak. Still, third-quarter business indicators released Monday showed the drop in the wages bill wasn’t as bad as it might have been given hours worked fell 3.1 per cent.

The wage weakness was also more narrowly based than during last year’s lockdown. Eleven of 17 industries posted declines in July-to-September this year compared with 16 of 17 through April-to-June 2020.

Bloomberg