Covid-19 ends Australia’s run of record growth

Via Financial Times

Australia is facing its first recession in almost 30 years after bushfires and the coronavirus pandemic caused the economy to contract during the first quarter.

Gross domestic product fell 0.3 per cent in the three months to the end of March compared with the previous quarter, according to the Australian Bureau of Statistics.

The economy took a hit after bushfires swept across Australia’s east coast in January, to be followed in March by the start of “social distancing” rules and travel bans aimed at suppressing spread of the virus.

But the full impact of the Covid-19 shutdown is expected to be felt only in the second quarter of 2020. Last month Canberra forecast the economy could shrink by as much as 10 per cent owing to temporary closures of businesses, schools and some government services.

Official confirmation that Australia has suffered two consecutive quarters of contraction — the technical definition of a recession — will not occur until September. But economists said the pandemic would now almost certainly end Australia’s record-breaking run of 29 years without recession.

In the 12 months to the end of March, annual growth slowed to 1.4 per cent, the weakest result in more than a decade, owing mainly to a 1.1 per cent fall in household consumption, which makes up almost 60 per cent of the economy.

“This was the slowest through-the-year growth since September 2009, when Australia was in the midst of the global financial crisis, and captures just the beginning of the expected economic effects of Covid-19,” said Bruce Hockman, ABS chief economist.

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Sarah Hunter, economist at BIS Oxford Economics, said that Australia’s success in handling fallout from the Covid-19 crisis and the roll out of government support packages worth tens of billions of dollars would reduce the economic damage.

BIS Oxford Economics forecast a peak to trough fall in GDP to be “significantly less than 10 per cent”, which would be a better outcome than many other developed nations.

Optimism about the economic recovery has driven a surge in the value of the Australian dollar, which hit a five-month high of 69.83 US cents shortly before the ABS released the GDP data. It later fell back to 69.45 US cents.

Josh Frydenberg, Australia’s treasurer, said the economy was already in recession based on government advice. But he also said the small contraction in the face of a “one-in-100-year” global pandemic showed that the Australian economy had been “remarkably resilient”.

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“The average fall [in GDP] across the OECD is six times what we have seen here in Australia,” he said.

There have been only 102 deaths from Covid-19 in Australia, with just a handful of new cases reported every day, mainly from returning travellers. This has allowed most states to relax social distancing restrictions, enabling restaurants, bars and even gyms to reopen this week.

Philip Lowe, governor of the Reserve Bank of Australia, said this week the economy had fared better than initially feared.

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“A stronger economic recovery is possible if there is further substantial progress in containing the coronavirus in the near term and there is a faster return to normal economic activity,” he said.