Australia’s economy expected to have shrunk about 3% in September quarter

Treasury secretary Steven Kennedy outlines estimated GDP drop as inflation figures show large jump in underlying measures

Australia’s economy is expected to have shrunk “around 3%” in the September quarter as the Covid pandemic forced key states to curb activity, with as much as two-thirds of the population locked down at the start of August, the Treasury secretary, Steven Kennedy, has told Senate estimates.

Separately, inflation figures for the September quarter showed a surprisingly large jump in the underlying measure as supply disruptions propelled petrol prices to record levels and the cost of new dwellings climbed to their highest level in 21 years.

The estimated drop in the quarterly gross domestic product was the second-highest on record, exceeded only by the 7% plunge in the June quarter last year during the first wave of Covid disruptions.

“From July to September this year employment fell by 2.2%,” Kennedy told senators. “Business and consumer confidence has also declined, owing to heightened uncertainty, but remains much higher than the record lows reached in 2020.”

Federal and state governments provided an estimated $20bn in direct economic assistance to businesses and households, Kennedy said. More than half of the money went to people under 35, with a similar share, at 58%, going to those in the bottom 40% of incomes.

“Somewhat surprisingly, there’s little commentary about the significance of this potential contraction in [economic] activity,” he said. “Our assessment is that it mostly reflects the effectiveness of past and current fiscal interventions.”

The massive build-up in savings by both households and businesses provides some degree of comfort during the recovery phase, he said.

“Household and non-financial business deposits are almost $330bn higher compared to the end of 2019,” Kennedy said, adding that household cash savings were up $145bn compared with the end of August 2020.

“The run-up in household and business balance sheets provides resilience and will continue to support activity throughout the recovery,” Kennedy said.

The comments to estimates came before the September quarter consumer price index data were released by the Australian Bureau of Statistics.

The headline CPI figures were inline with the expectations of economists, coming in at an annual pace of 3% in the September quarter, and 0.8% higher for the July-September period alone. The comparable June quarter numbers were 3.8% and 0.8%, respectively.

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The focus, though, will fall on the CPI’s underlying measures, the trimmed mean and weighted median gauges. These strip out volatile movements such as the winding back of free childcare during this period a year ago that would distort price changes.

Both of these two measures jumped by 0.7 percentage points to an annual increase of 2.1%. It was the first time they have been in the 2% to 3% range that the central bank is targeting since 2015’s September quarter.

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Markets responded by sending the Australian dollar higher by about one-third of a US cent to above US75.3c, while bond yields also advanced as investors bet the reserve bank will have to move sooner to raise interest rates than they had expected before today’s release.

ANZ’s economists, Hayden Dimes and David Plank, said “there was surprising strength in a range of services like insurance and restaurant meals”, in a report on the CPI.

They said the RBA was unlikely to change its view on wages growth much, despite the higher inflation figures, with the next rise in official interest rates still unlikely before 2024. Even so, the jump in underlying inflation “sets things up for an ongoing battle between the RBA’s outlook and market pricing” as to when that rise would come, they said.

Also contributing to the higher inflation was the 3.3% jump in the cost of new dwellings, the biggest increase since the September quarter of 2000.

Those bottlenecks, caused in part by Covid pandemic effects, have also pushed automotive fuel prices to record levels. The 7.1% jump in prices exceeded a similar advance in the June quarter, with the maximum average daily unleaded petrol price across Australia hitting a record $1.65.

Electricity prices, though, have gone the other way, lately plunging thanks to the spread of renewable energy sourcesThe ABS is slated to release the formal September quarter GDP figures on 1 December.

While housing costs mights may be on the up, rents are not gaining as quickly. “Rental inflation had been trending lower over the last decade and we only expect a gradual lift in it over the next year,” the ANZ economists said. Rents for the quarter just ended were 0.2% higher than for the June quarter.

Westpac’s senior economist Justin Smirk highlighted alcohol and tobacco, which dropped 0.5% in the quarter, and clothing and footwear, down 3.8%, as other downside surprises.

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“The September quarter CPI was still under the push/pull influence of changing government support, subsidies and grants even if it has significantly faded,” he said in a note. “We are currently looking for core inflation to peak at just under 3% in late 2022 before easing back though 2023.”

Separately, Woolworths, one of the country’s two biggest supermarket chains, reported a first-quarter sales gain of 7.8% to $16.07bn. It said the period had “arguably been the most challenging Covid quarter for our business”, with many disruptions to its stores and supply chain.

The sales were a disappointment to investors, who sent shares more than 4% lower at one stage before they pared back some of the losses. The overall market was flat for the day by mid-afternoon trading.

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Peter Hannam Economics correspondent

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