Australian GDP: Recession, but positives for the outlook
Australia’s real GDP in 2Q20 fell a record 7.0% QoQ and 6.3% YoY. Key points:
- Australia is in recession, with COVID-19 ending Australia’s record 29-year expansion. That said, Australia’s -6.3% YoY far outperforms its peers: US -9.1% YoY, Canada -13% YoY, Europe -15% YoY & UK at -21.7% YoY.
- Collapsing consumption drove the recession, -12.1% QoQ and -12.7% YoY. Services fell sharpest, -17.6% QoQ and 19.3% YoY, led by Transport (-88.2% YoY), Hotels & Restaurants (-60.2% YoY) & Health (-20.2% YoY).
- Investment was weak: Business fell 4.8% QoQ and 6.2% YoY, Residential fell 6.8% QoQ and 11.2% YoY, and Inventories fell at a record pace.
- On the positive side: i) Trade added 1.0% to growth in 2Q20, with imports (-19.1% YoY) falling more than exports (-10.6% YoY); ii) Government GDP spending and investment grew a robust 2.5% QoQ and 6.3% YoY.
- Looking ahead, factors driving a strong rebound include: i) Reopening as the second wave ends, driving a services rebound; ii) a consumer recovery funded by a record 19.8% saving rate; iii) a powerful inventory rebound from record lows; iv) a business investment rebound funded by saved stimulus; v) farm sector recovery post-drought; and vi) recovering exports on Asia’s V-recovery.
- Early 3Q20 trends are mostly positive: July retail sales a record 10.5% above 2Q levels; vehicle sales down 12.8% YoY, versus down 26.9%YoY in 2Q20; dwelling approvals 0.9% above 2Q levels; though confidence by consumers (-20% YoY) and business (-14pts) softened on the second wave.
Investment implications: The record decline in GDP increases the likelihood of further stimulus in the Federal Government’s October budget, going beyond the $35 billion (1.75% of GDP) already announced. At yesterday’s meeting, the RBA expanded its Term Funding Facility and bond purchases, so policy support is stepping up. With the six positives noted above, we expect the ASX 200 to resume its rally toward our 6750 index target. Click here to read full report