By Gerelyn Terzo of Sharemoney
Australia, which boasts a population of 25 million, is on the comeback trail after GDP climbed higher by a low single-digit percentage in the first quarter. While it might not seem like much, it comes after Australia’s economy was mired in recession during the coronavirus year.
Apparently the economic recession was not as bad as some other countries suffered and therefore the country’s comeback is turning heads. Despite the economic recovery, Australia has yet to open its borders, even for its own citizens, as it maintains its zero COVID-19 strategy. However, the nation is said to be close to relaxing its rules so that vaccinated citizens will be free to travel once again.
Australia’s 1.8% GDP growth in Q1 vs. the prior three-month period was a cause for celebration; not only was this increase better than anticipated, but it thrust the economy back to pre-pandemic levels. For the year so far, Australia’s economy has advanced 1.1% YoY. On social media, Australian Prime Minister Scott Morrison touted Australia’s economic recovery in comparison to other major economies.
Source: Twitter
The states of New South Wales and Victoria were strong contributors to domestic demand, but there is a cloud looming. As of early June, a variant of COVID-19 thought to have originated from India, known as Delta, has made its way to Victoria, specifically in the city of Melbourne, leaving officials to renew lockdown measures in an attempt to stop the spread of the virus. Unfortunately, the renewed economic lockdowns could spill over into GDP results for second-quarter GDP results.
Bigger Picture
Australia’s Q1 economic expansion was two-pronged, fueled both by strengthening demand for commodities as well as greater spending by households and businesses alike. Australia’s economy has also been supported by government stimulus and dovish monetary policy. The contributions from three key segments — household consumption, dwelling investment and business investment — all inched higher in Q2 vs. December 2020 levels, buoyed by the economic stimulus in the country:
- Household consumption added 0.7 percentage points
- Dwelling investment added 0.3 percentage points
- Business investment added 0.4 percentage points
The growth comes on the heels of an economic recession that gripped Australia during the year of widespread coronavirus disease. It also follows GDP growth in the 3% range in both Q3 and Q4 2020, indicating that the continued economic expansion is at hand.
Source: The Guardian
Unemployment in the country has recovered from last year’s high of 7.5% to 5.5% as of April.
Housing Prices Inch Higher
The economic recovery has been underpinned by Australia’s strengthening housing market. Housing is a major contributor to the Australian economy, representing 2% of total jobs and 6% of GDP, as of 2019.
Home prices in the country are showing signs of firming after inching higher by 2.2% in May, marking the eighth consecutive increase for this metric, yet triggering some fears that prices are rising too far, too fast. Meanwhile, new home construction is booming, with approvals for private home construction rising more than 67% in April vs. year-ago levels. Total dwelling unit approvals increased just over 39% in the same period. In Sydney, the median price for a home is now over AUD 970,000.
The housing sector has been helped by high savings among consumers coupled with attractive interest rates. The Reserve Bank of Australia (RBA), the country’s central bank, has been holding the line on interest rates at an all-time low of 0.1%. The RBA does not anticipate higher inflation rearing its head in the foreseeable future and therefore has no plans to raise interest rates for another three years at the soonest. The central bank recently revealed that it needs to see higher wage growth comfortably above the 3% level prior to even thinking about raising rates. Rising wages would likely lift inflation closer to the central bank’s target of 2-3%.
Lockdown Levels
Despite the fact that Australia’s economy is looking up, the government has yet to lift the international travel ban that has been in place for over a year. Australians have been restricted from traveling abroad since March 2020, as the government takes strict measures to prevent its citizens from spreading the virus further. Aussies are allowed to leave the country if they can prove “exceptional circumstances” and offer a “compelling reason.”
While Australia’s strict travel rules have been credited with preventing a worsening spread of the virus, some people believe that the government controls have gone too far. The Associated Press reported on Esther and Charles Baker from Melbourne, who were denied a travel exemption twice after appealing to the courts for approval to see their son get married in the United States in June 2020.
The couple, who are ultra-Orthodox Jews, argued their cultural and religious beliefs qualified them, but the court disagreed, not only dismissing the case but also slapping the Bakers with the government’s legal bill.
As it stands, the Melbourne lockdowns have been some of the most severe in Australia as restrictions continue to be renewed in the city. The latest two-week lockdown round was implemented in late May as a response to a doubled number of COVID infections to more than two-dozen. Melbourne’s population of 5 million can only leave for the following reasons:
- Essential work
- Exercise
- Essential shopping
- Medical care
- Vaccination
On the other hand, Regional Victoria has begun to relax its restrictions, giving its residents the freedom to move about for any reason and without masks. Students and teachers are returning to school in Victoria, while indoor and outdoor businesses are once again open for business.
Australian Travel Minister Dan Tehan reportedly told Sky News that he does not anticipate a reopening of Australia’s borders for international travel until H2 2022. In April, a travel bubble emerged in the Southwest Pacific region between Australia and New Zealand, allowing flights to resume between the two countries, as well as one between New Zealand and the Cook Islands. Flights to New South Wales were temporarily suspended amid an uptick in cases in the state but have since resumed.
Aussie lawmakers are exploring the possibility of a trial in which inoculated citizens can travel abroad in as soon as six weeks.
Economic Outlook
The RBA has tipped its hand to the possibility of another round of economic stimulus to accelerate the COVID-19 recovery even as interest rates hover at record lows. The central bank is already on the hook for more bond purchases comprising two tranches of AUD 100 billion each in another round of quantitative easing. It forecasts that GDP will grow 4.75% in 2021 followed by a 3.5% economic expansion in 2022.
