Investment in Australia

Australia - Investment

Combination of bushfires, drought and Covid-19 hits the economy hard in Q1

A severe bushfire season coupled with a prolonged drought and lockdown measures to combat the coronavirus pandemic hit the economy hard in the first quarter of the year. GDP fell 0.3% quarter-on-quarter in seasonally-adjusted terms in Q1, contrasting a 0.5% quarter-on-quarter increase in the fourth quarter of 2019, according to figures released by Australia’s Statistical Institute (ABS) on 3 June. The result matched expectations and marked the sharpest contraction since Q4 2008. Meanwhile, on an annual basis, the economy grew 1.4%, down from Q4’s 2.2%.

A slump in household spending and shrinking fixed investment amid job losses and business shutdowns were behind the dire reading. Private consumption plunged (Q1: -1.1% s.a. qoq; Q4 2019: +0.5% s.a. qoq) amid a sharp fall in spending on those services most affected by restrictions and as households increased their savings in the face of an uncertain economic outlook. In addition, fixed investment contracted again (Q1: -0.8% s.a. qoq; Q4 2019: -1.2% s.a. qoq) due to souring business sentiment and suppressed activity at the tail-end of the quarter. On the other hand, government spending gained considerable pace (Q1: +1.8% s.a. qoq; Q4 2019: +0.9% s.a qoq) thanks to a large fiscal stimulus plan.

The external sector, meanwhile, supported the economy to a greater extent than in Q4. Exports fell 3.5% (Q4 2019: -0.2% s.a. qoq), weighed down by shrinking services exports, while imports dropped a larger 6.2% in Q1, after growing 0.1% in Q4 2019, due to shrinking purchases of consumption and capital goods.

The economy is poised to be hammered by the health crisis and associated lockdown this year, as both external demand and domestic activity are hit. That said, measures taken by the government and the Central Bank should help cushion the downturn somewhat. A faster-than-expected recovery in China poses upside risks.

Consensus Forecast panelists see the economy shrinking 4.1% in 2020, which is down 0.5 percentage points from last month’s forecast, and growing 4.1% in 2021.