Investment in Australia

Australia - Investment

Economic recovery continues in Q1 amid strong fiscal and monetary support

GDP rose 1.8% in seasonally-adjusted quarter-on-quarter terms in Q1, benefiting from strong fiscal and monetary stimulus. The result beat market expectations and followed Q4 2020’s 3.2% expansion. Meanwhile, on an annual basis, the economy rebounded in the first quarter, increasing 1.1% year-on-year and contrasting the 1.0% contraction recorded in the fourth quarter of last year.

The first quarter’s result was driven by sturdy domestic demand. Growth in fixed capital spending accelerated in Q1, coming in at 4.7% in seasonally-adjusted quarter-on-quarter terms, following the 3.4% increase tallied in the prior quarter. This came on the back of strong investment in machinery and equipment and dwellings, and was partly driven by the government’s fiscal incentives. Meanwhile, household spending growth moderated but remained healthy nonetheless, coming in at 1.2% in Q1, following Q4 2020’s 4.5% jump. However, government spending dropped 0.5% in Q1, swinging from Q4 2020’s 0.9% increase. Lastly, restocking added 0.7 percentage points to growth in the quarter, as companies likely opted to replenish their warehouses amid vaccine-related hopes of higher demand, and emerging supply disruptions.

The external sector, meanwhile, dragged heavily on the economy, as growth in imports outpaced the increase in exports. The expansion in exports of goods and services moderated to 0.5% in Q1 (Q4 2020: +4.1% s.a. qoq). Meanwhile, imports of goods and services increased 3.7% in Q1, highlighting the ongoing recovery in domestic activity (Q4 2020: +5.4% s.a. qoq). Overall, the external sector subtracted 0.5 percentage points from growth.

Commenting on the outlook, Robert Carnell, regional head of research for Asia-Pacific at ING, stated:

“Pent up demand and the lagged effects of stimulus measures for household spending is still powering the Australian economy along. But with total (real, seasonally adjusted) GDP of AUD501bn in 1Q21, more than the previous pre-Covid high of 497bn in 4Q19, the period of most rapid catch-up has now probably passed. GDP growth is likely to be driven less by "recovery" and "stimulus" in the coming quarters, and more by underlying growth prospects.”

Meanwhile, Sean Langcake, principal economist at Oxford Economics, stated:

“The sharp recovery in investment will bolster the near-term outlook and has also improved our expectations for productivity and growth in the medium term. With the recovery well ahead of schedule, we have lessened the degree of economic scarring from the pandemic-induced recession in our forecasts. We have upgraded our forecast for growth in 2021 to 5.3%, followed by 3.2% in 2021.”

FocusEconomics panelists project GDP to expand 5.2% in 2021, which is unchanged from last month’s estimate. In 2022, the economy is seen expanding 3.3%.