Consumer spending drives Australia’s Covid recovery

Economy News

Australia’s economy is bigger than it was before the pandemic following a strong rebound in the fourth quarter of last year, when consumers emerged from lockdown to spend heavily over Christmas.

Gross domestic product grew 3.4 per cent in the final three months of 2021, in stark contrast to a 1.9 per cent contraction in the third quarter, when restrictions introduced to quell an outbreak of the Delta variant threatened to push the country into recession.

With an election due to be named after the budget this month, Josh Frydenberg, Australia’s treasurer, attributed the rebound to the government’s financial policies. He said the spread of Omicron and the war in Ukraine would not derail the economic performance.

“Australians and Australia are world beaters,” said Frydenberg. “We have one of the highest vaccination rates in the world, one of the lowest mortality rates in the world and now, unquestionably, one of the strongest economic recoveries in the world.”

Australia introduced some of the strictest global lockdown rules in 2020, including closing its borders. Restrictions were reimposed in 2021 after the emergence of the Delta variant.

Gareth Aird of Commonwealth Bank said that Australia’s economy was now larger than before the pandemic after GDP growth hit its equal strongest quarterly growth rate since March 1976.

Consumers, who have accumulated A $ 250bn (US $ 181bn) of savings since the start of the pandemic, drove the recovery. Spending on hotels, cafes and restaurants rose 24 per cent in the quarter while expenditure on recreation and culture grew 17 per cent. Clothes and footwear sales were up more than 40 per cent.

Josh Williamson, an analyst at Citigroup, said consumers had offset declining business and public sector investment. “The only reason the economy managed to finish the year so strongly was because household consumption increased by a massive 6.3 per cent,” he said.

“Stated differently, households contributed 3.2 percentage points to the 3.4 percentage points of growth in the fourth quarter.”

Exports fell by 1.5 per cent with lower coal, metals and mineral fuels shipments offsetting robust growth in cereals.

Paul Bloxham, an economist with HSBC, warned that the impact of the Omicron variant would weigh on first quarter numbers. “Nonetheless, retail sales still rose in January and falling Covid-19 case numbers, as well as rising mobility indicators, suggest first-quarter GDP will slow, not fall,” he added.

The GDP data came in below forecasts from the Reserve Bank of Australia, which has yet to raise interest rates despite above-target inflation. The Reserve Bank of New Zealand has raised rates three times in the space of six months to curb inflation.

Williamson said that the war in Ukraine would probably make central banks more dovish and did not expect the cash rate to rise in Australia until August.

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