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Australia in its first recession in 29 years as March quarter GDP shrinks

Official figures show Australia's economy shrank 0.3 per cent in the March quarter, amid bushfires and the early stages of the coronavirus pandemic, making a recession certain with a big fall in activity in the current June quarter.

GDP figures from the Bureau of Statistics show Australia's economy shrank 0.3 per cent in the March quarter, amid bushfires and the early stages of the coronavirus pandemic.

Key points:
  • Australia's GDP, or economic output, fell 0.3pc over the March quarter
  • With a big fall in GDP certain in the current June quarter that will mark Australia's first technical recession in 29 years
  • A rise in net exports and grocery spending could not offset the large falls in spending on travel and other services

This makes it certain that Australia will suffer its first recession in 29 years, as the full impact of coronavirus-related shutdowns occurred during the current June quarter.

Economists widely define a recession as two consecutive quarters of GDP contraction, which are now certain to occur.

The last time Australia recorded two consecutive negative quarters for GDP was March and June 1991, dubbed by then treasurer Paul Keating as "the recession we had to have".

Even before the full effect of the coronavirus hit, Australia's economy recorded its slowest annual growth in more than a decade, according to the ABS.

"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," the bureau's chief economist, Bruce Hockman, said.

Economic 'Armageddon' avoided, Treasurer Josh Frydenberg says
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Federal Treasurer Josh Frydenberg confirms Australia is in a recession.

While admitting that Australia is now in recession, Treasurer Josh Frydenberg said it could have been a lot worse.

"Treasury were contemplating a fall in GDP of more than 20 per cent in the June quarter. This was the economists' version of Armageddon," he told reporters at Parliament House.

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"It was in this quarter — the March quarter — that consumer and business confidence fell to its lowest level on record. That the ASX 200 lost a third of its value and, on the 16th of March, saw its biggest daily fall of 9.7 per cent on record.

"When combined with the ongoing drought, which saw farm GDP fall by 2.4 per cent in the quarter, and the devastating impact of the fires that were raging across many states, one looks back on the March quarter, and there wasn't much good news.

"Seen in this context, the fact that the Australian economy only contracted by 0.3 per cent shows the Australian economy's remarkable resilience.

"Indeed, Australia's performance in the March quarter compares very well to that seen in other nations, with negative growth of 9.8 per cent in China, 5.3 per cent in France, 2.2 per cent in Germany, 2 per cent in the United Kingdom and 1.3 per cent in the United States."

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However, Labor's shadow treasurer Jim Chalmers took aim at the Government's economic performance prior to the pandemic.

"While the pandemic came without warning, long-standing weakness in the economy did not," he said.

"Even before the worst of this virus, even before the bushfires, we had issues with weak growth, and stagnant wages, and weak business investment, and productivity, and net debt in the budget had already more than doubled.

"So we entered this very difficult crisis from a position of weakness rather than strength."

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Sarah Hunter from BIS Oxford Economics said that the nation looks like escaping a worst-case scenario akin to the Great Depression.

"With the health outcomes tracking better than expected [which has allowed an earlier-than-anticipated end to lockdown conditions] and the government packages providing a significant support to household income, the decline in GDP in the first half of 2020 will be relatively small when compared to other economies," she wrote.

"We now expect the peak-to-trough fall in GDP to be significantly less than 10 per cent.

"Although the immediate outlook is better than anticipated a couple of months ago, the economy still faces challenges.

"The size and speed of the decline are unprecedented and, as currently legislated, there is a substantial policy cliff edge at the end of the third quarter [when the majority of the additional support for households comes to an end] that must be navigated."

Mr Frydenberg said the Government would provide an update on both the economy and stimulus programs in July.

"The Finance Minister and I will be providing a detailed update on the economic numbers now in July as opposed to June, and we're doing so because we're going to announce, at the same time, the outcomes of our JobKeeper review," he told reporters.

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The household saving rate jumped as households slashed spending, despite a 6.2 per cent increase in social assistance benefits.

"Households have already moved to boost precautionary savings, with the savings rise jumping to 5.5 per cent from 3.5 per cent in the fourth quarter of 2019 even as income was boosted by social assistance benefits," noted EY's chief economist Jo Masters.

"This shift reflects the intensifying headwinds to spending.

"Households are absorbing higher unemployment, elevated job insecurity, falling house prices, concerns about a second COVID-19 outbreak, all against a backdrop of already high debt levels."

The single biggest drag on the economy was this dramatic slump in private demand, which knocked 0.8 percentage points from GDP, as household consumption fell 1.1 per cent.

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The ABS said a rise in spending on goods, notably in food and pharmaceuticals as people hoarded amid the early stages of the COVID-19 pandemic, was not enough to offset a significant fall in services spending.

The biggest spending falls were in those areas most severely affected by travel and social-distancing restrictions, such as transport services (-12 per cent), hotels, cafes and restaurants (-9.2 per cent), and arts and recreation.

Sales of clothing and footwear also plunged (-8.9 per cent) as consumers focused their purchases on essential goods and home office equipment in preparation for lockdowns.

Separate ABS data show these are also the sectors that have suffered the largest job losses.

Partly offsetting the falls were a rise in government spending, which added 0.3 percentage points to growth, and net trade, which contributed 0.5 percentage points as imports slumped while commodity exports held up reasonably well.

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