Below trend growth to continue
GDP Q3 2021 – A short and sharp fall, now firmly in the rear view mirror.
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Q3 GDP fell by 1.9% q/q a sharp, but importantly smaller fall than expected. The decline was driven by a sizeable fall in household consumption, concentrated in services where lockdowns have the most significant impact. Government support again played an important role cushioning household and business balance sheets. While these data show the significant disruption caused by lockdowns in the two largest states, they are now firmly in the rear-vision mirror with higher frequency data suggesting that a very solid rebound is already underway. State final demand also showed solid growth in non-lockdown states. We expect Q4 GDP to rise by 2%, which would see the pre-Delta level of GDP almost recovered by year’s end. The hit to Q3 GDP is less than what the RBA’s -2.5% expectation was in the November SoMP. Further out our view is unchanged. We expect above-trend growth to continue in 2022 and the unemployment rate to resume its prior downwards trajectory (4.2% at end 2022), with the RBA beginning to lift rates in mid-2023. In addition, we see the RBA having enough evidence on progress towards its goals to end purchases in the QE program by February.
In terms of today’s release, the data show a notable decline across all three measures of GDP. On the expenditure side, household services consumption led the decline (though goods spending also fell) and inventories made a significant subtraction. Aggregate business investment also detracted slightly, while dwelling investment was largely flat. A strong rise in government consumption provided support, while net exports also rebounded in the quarter, offsetting some of the decline in private demand and inventories.
By industry, the production side of the accounts reflected the hit to services consumption with accommodation & food, rec & personal, transport and other services seeing notable declines. The income side reflected the support provided by all levels of government with a sharp increase in subsidies in the quarter, while compensation of employees and business profits held up reasonably well given the wider result.
Of note was a sharp spike in the household savings rate, also reflecting the support provided by the government and reduced spending during lockdown. This provides us with confidence that with the economy opening up, household spending will recovery sharply, and while the balance between goods and services spending will normalise over time, the near-term will continue to see a solid contribution to growth from the consumer.
Looking forward, we expect GDP to see a solid rebound in Q4, rising 2.0% consistent with a range of high frequency data including the NAB business survey, measures of labour demand and transactions data. We expect the rebound to continue into Q1 2022, which will see the pre-Delta level of GDP recovered in Q1 next year. We see above trend growth continuing through 2022, with GDP rising by over 4% in the year. Growth should then return to around trend in 2023 with the rebound complete and policy stimulus beginning to fade. This outlook for growth sees a corresponding recovery in the labour market with the focus over 2022 being how quickly a tightening labour market translates into wage growth and when this begins to show up in consumer prices on an ongoing basis.
Find out more in the NAB Australian GDP Q3 2021 Report
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