• ‘V-shaped’ recovery: The Australian economy (as measured by gross domestic product or GDP) grew by 3.1 per cent in the December quarter (consensus: +2.5 per cent) after rising 3.4 per cent in the September quarter and contracting 7 per cent in the June quarter. It was the biggest six-month lift in GDP since quarterly records began in 1959. GDP is still 1.1 per cent smaller than a year ago.
• Annual result: In 2020, the economy contracted 2.5 per cent (biggest fall since 1947) after growing 1.9 per cent in 2019.
• Contribution to growth: The biggest contributions to growth came from household spending (+2.3 percentage points); business equipment (+0.3pp); ownership transfer costs, dwellings, government consumption (all +0.2pp); and public investment (+0.1pp). But detracting from growth was net exports, commercial construction and inventories (all -0.1pp).
• Income: Real net national disposable income rose by 4.9 per cent in the December quarter and was up by 2.1 per cent on the year. In nominal terms GDP rose by 4.2 per cent in the quarter and rose by 0.6 per cent over the year.
• Productivity: GDP per hours worked was flat in the December quarter but was up by 2.5 per cent on the year.
• Industry sectors: Seventeen of the 19 industry sectors grew in the December quarter. The biggest contribution to the overall increase in output came from Agriculture, Forestry and Fishing (+0.5 percentage points) from Professional, Scientific and Technical Services and Administrative and Support Services (both +0.3pp). Output fell 1.0 per cent in Mining in the quarter with Electricity, Gas, Water and Waste Services down 0.9 per cent.

What does it all mean?

• It has been a most curious period for the Australian economy. After entering recession in the first half of 2020, the economy roared back in the final six months of the year. Clearly it has been all about Covid-19. Australian governments and the central bank responded quickly in locking down the economy and in providing the support and stimulus to families and businesses. The moves to suppress the virus were effective as were the support and stimulus measures.
• The ‘V-shaped’ nature of the recovery is everywhere to see – economic growth, the job market, retail spending and the housing market. The Reserve Bank acknowledges that the recovery has been stronger than expected.
• But the job is not done. The economy is still around 1 per cent smaller than a year ago. Unemployment is still too high; inflation and wage growth are still too low. But the forward indicators like job ads and business and consumer surveys are positive.
• We expect the economy to rebound 4.2 per cent in 2021 after contracting by 2.5 per cent in 2020 (lowest in 73 years). Much still depends on Aussies doing the right thing with social distancing measures. The vaccine roll-out is in the infancy. And then there is the risk posed by mutant strains of the virus.
• Stimulus and support measures are still very much required, and any scale-back needs to be carefully managed. The Reserve Bank certainly hasn’t changed its rhetoric. Rates will remain low for another three years. Bond buying will continue. Cheap loans will remain under offer to business.
• The all-important jobless rate is expected to ease from 6.4 per cent currently to 5.7 per cent by the end of 2021. While still high, clearly it is moving in the right direction. But spare capacity will remain in the job market for a few more years, keeping the cash rate anchored at 0.1 per cent.  

What do the figures show?

• Economic Growth: The Australian economy (as measured by gross domestic product or GDP) grew by 3.1 per cent in the December quarter after rising 3.4 per cent in the September quarter and contracting 7 per cent in the June quarter. It was the biggest six-month lift in GDP since quarterly records began in 1959.
• The economy contracted by 1.1 per cent in the year to December. Growth has averaged 2.1 per cent over the decade and growth averaged 2.3 per cent over the last 15 years. 
• Annual result: In 2020, the economy contracted 2.5 per cent (biggest fall since 1947) after growing 1.9 per cent in 2019.
• The non-farm economy grew by 2.6 per cent in the December quarter after growing by 3.5 per cent in the September quarter. Non-farm GDP is down 1.5 per cent over the year.
• Farm GDP fell by 33.3 per cent in the December quarter to be up by 22.6 per cent over the year.
• At current prices, GDP grew by 4.2 per cent in the December quarter after rising by 4.0 per cent in the September. Nominal GDP grew by 0.6 per cent on the year (decade average +4.5 per cent).
• As at December 2020 the Australian economy was valued at $1,972.2 billion.
• GDP per capita grew by 3.0 per cent in the December quarter after rising by 3.3 per cent in the September quarter to be down 1.8 per cent on the year.
• Contribution to the overall result: The biggest contributions to growth came from household spending (+2.3 percentage points); business equipment (+0.3pp); ownership transfer costs, dwellings, government consumption (all +0.2pp); and public investment (+0.1pp). But detracting from growth was net exports, commercial construction and inventories (all -0.1pp).
• Inflation & wages: In terms of domestic price pressures, the household consumption implicit price deflator rose by 0.2 per cent in the September quarter. Annual growth eased from 0.5 per cent to a 57-year low of 0.3 per cent. Real non-farm unit labour costs rose by 7.4 per cent in the December quarter and were down 4.0 per cent over the year.
• The terms of trade rose 4.7 per cent in the December quarter to be up 7.4 per cent on the year.
• Productivity: GDP per hours worked was flat in the December quarter but was up by 2.5 per cent on the year. Gross value added per hours worked in the market sector rose by 0.1 per cent in the quarter to be up 2.8 per cent on the year.
• States & Territories: The only data available is state final demand (more accurate data would include net exports but it is not available for all states and territories). State final demand in the December quarter: NSW (up 2.9 per cent); Victoria (up 6.8 per cent); Queensland (up 2.0 per cent); South Australia (up 0.6 per cent); Western Australia (up 1.5 per cent); Tasmania (up 3.3 per cent); Northern Territory (up 4.1 per cent); and ACT (up 1.5 per cent).
• Consumer spending: Household spending rose by 4.3 per cent in the December quarter to be down 2.7 per cent for the year.
• The ABS notes: “The ongoing recovery in spending on hotels, cafes and restaurants (+17.5 per cent) and recreation and culture (+9.1 per cent) drove overall household consumption growth, particularly as Victoria moved out of stage 4 restrictions. Spending on discretionary services remained subdued through the year, driven by weakness in transport services (-78.1 per cent) and hotels, cafes and restaurants (-29.8 per cent). COVID-19 travel restrictions as well as capacity limits for hospitality venues, public events and office attendance continued to impact these individual categories.”
• “Household consumption on goods remained robust and was supported by the increased preference to shop online since the outbreak of COVID-19. Online sales events such as Black Friday in late November also boosted household spending on goods in the December quarter.”
• “Purchase of vehicles increased 31.8 per cent in the December quarter, the largest rise in the history of the national accounts. The increase was in part driven by continued restrictions on international travel which led to a shift in households spending on domestic holiday travel.”
• Industry sectors: Seventeen of the 19 industry sectors grew in the December quarter. The biggest contribution to the overall increase in output came from Agriculture, Forestry and Fishing (+0.5 percentage points) from Professional, Scientific and Technical Services and Administrative and Support Services (both +0.3pp). Output fell 1.0 per cent in Mining in the quarter with Electricity, Gas, Water and Waste Services down 0.9 per cent

Other points:

• Profit share eases from record high. In seasonally adjusted terms, the ratio of profits to total factor income eased from a record 31.1 per cent in the September quarter to 30 per cent in the December quarter. The wages share rose from a record low of 49.0 per cent to 50.9 per cent in the December quarter.
• Household savings ratio. The household saving ratio eased from 18.7 per cent in the September quarter to 12.0 per cent in the December quarter.
• Imports rose as a share of spending. The imports to sales ratio rose from 0.389 to 0.396 in the September quarter. The ratio of 0.404 in December quarter 2018 was an 11-year high.
• The private non-farm inventories to total sales ratio fell from 0.595 in the September quarter to a record low of 0.568 in the December quarter.

What is the importance of the economic data?

• The quarterly National Income, Expenditure and Product release (national accounts) from the Bureau of Statistics is an assessment of Australia’s economic performance. Detailed estimates are provided on incomes (wages, profits), spending (such as household, dwelling investment and trade (exports and imports) and production. Other data includes household saving and the economic performance of States and Territories. The main use of the national accounts figures is as a historical record of economic performance. The information has little forward-looking value for currency, interest rate or share markets.

What are the implications for investors?

• There is a lot to like with the latest national accounts – the most comprehensive quarterly data on the health of the Australian economy. But it is always important to note that the figures are backward looking. After a record quarterly contraction of the economy, there has been a record rebound – admittedly over six months rather than three months. But a strong recovery is underway.
• A quick, strong recovery provides greater scope to get more people back to work. The longer that someone stays out of work, the less employable they are likely to be. But there are plenty of job vacancies, and foreign borders are closed, so the opportunity is for Aussies to fill the positions.
• Looking ahead, household saving is still high, providing scope for more spending. Inventories are also at a record low when compared with sales, so there is scope to boost production. And, as noted, the lift in job ads boosts prospects for employment. There are also a raft of infrastructure projects to be started and new houses to be built.
• The other good news is that more people are finding work and productivity is lifting at the same time. And to top it off, the farm sector is going gangbusters on favourable climactic conditions, relatively high prices and solid demand.

The information presented on this page is an extract of a CommSec Economic Insights report. The full report is published on the CommSec website (under Market News > The Markets). The extract and full report are approved for distribution in Australia only and must not be directed or distributed to any person or entity outside Australia.