Recession alert: Australia's economy shrank in first quarter - 9japarrot


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Tuesday 2 June 2020

Recession alert: Australia's economy shrank in first quarter

Household consumption was the biggest drag on Australia's growth last quarter with massive falls in spending on clothing, cars, transport, recreation, hotels, cafes and restaurants [File: Loren Elliott/Reuters]

Analysts expect an even deeper contraction in the second quarter, setting up its first recession in 30 years.

Australia's economy shrank last quarter, setting the scene for what is expected to be the country's first technical recession in three decades as entire business sectors shut down to fight the coronavirus.

Wednesday's data from the Australian Bureau of Statistics showed the economy contracted by 0.3 percent in the first quarter ended March compared with the last three months of 2019, the first decline in nine years.

Compared with the same period last year, Australia's gross domestic product expanded by 1.4 percent, but that was the slowest expansion since the 2008-2009 global financial crisis.

The result sets up an end to Australia's record run of avoiding two consecutive quarters of shrinking GDP - the definition of a recession - having dodged them during the 1997 Asian Financial Crisis, the Dot-Com Bubble and the global financial crisis.

Australia's two trillion Australian dollar (US$1.39 trillion) economy is facing its worst contraction since the Great Depression in the current quarter, with almost 600,000 jobs lost in April alone and much of the economy in lockdown to contain the coronavirus.

Household consumption was the biggest drag on growth last quarter with massive falls in spending on clothing, cars, transport, recreation, hotels, cafes and restaurants.

The economic fallout deepened in Australia as the number of local coronavirus cases surged from fewer than 100 in early March to more than 7,000 now, forcing the government to shut borders and restrict large gatherings.

"The decline in GDP in the first quarter pales in comparison to the much larger fall in Q2," Ben Udy Australia and New Zealand economist at research firm Capital Economics, wrote in a research note sent to Al Jazeera.

"Indeed, we estimate that consumption may be nearly 20 percent below its pre-virus levels in Q2. One reason is that households stopped panic buying of food. But most of it will be driven by the restrictions to recreation and retail services," Udy added.

Fiscal and monetary policy are working in tandem to rebuild the economy. The Reserve Bank of Australia (RBA), the country's central bank, has taken the cash rate near zero and lowered the cost of borrowing with its 0.25 percent bond yield target. The government has injected tens of billions of dollars into the economy to help tide businesses and households through the lockdown.

With the containment of the health crisis allowing activity to resume, the critical question is how quickly businesses can get back on their feet, workers regain employment and households resume spending.

"The rate of new infections has declined significantly and some restrictions have been eased earlier than was previously thought likely," RBA Governor Philip Lowe said Tuesday after keeping borrowing costs unchanged.

The RBA stepped in by cutting the cash rate to a record low 0.25 percent and launching an unlimited bond-buying programme.

The data shows Australia's economy was struggling from a devastating bushfire season, a slowdown in tourism and weak domestic demand even before the coronavirus-related mobility restrictions kicked in.


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