Australia’s economy plunged into its first recession in 29 years in the second quarter as the Covid-19 pandemic shut down firms and forced thousands into unemployment, with the outlook remaining murky as the key state of Victoria battles a resurgence of the virus.
The economy contracted by a record 7% from the previous quarter, adding to a 0.3% drop in national output in the first quarter, the Australian Bureau of Statistics said Wednesday. This marks the first time the Australian economy has experienced consecutive quarters of GDP contraction since 1991, and snaps an unrivalled period of prosperity for the resource-rich economy.
Private demand detracted 7.9 percentage points from GDP in the second quarter, driven by a 12.1% fall in household spending, the ABS said. Spending on services fell 17.6%, with declines in transport services, operation of vehicles and hotels, cafes and restaurants.
International border closures crunched the tourism sector through the quarter, while consumer confidence was savaged as many firms were kept afloat only through government assistance. Economists expect that it could take years for the job market to recover from the shock and warn that many firms may yet fail.
The downturn in the Australian economy has been cushioned by the deployment of a record fiscal stimulus focused on keeping firms in operation and retaining workers on payrolls, while the Reserve Bank of Australia has cut interest rates to almost zero and adopted measures to support liquidity for banks.
Treasurer Josh Frydenberg will unveil the government’s budget for 2020-21 next month, where he is expected to announce more measures to support the economy as it struggles to gather momentum over the coming quarters.
RBA Gov. Philip Lowe also said this week that the central is examining ways to add more stimulus, though he also flagged that the state and federal governments are best placed to do the heavy lifting through increased spending on infrastructure.
The biggest risks for the economic outlook now focuses on the state of Victoria, which accounts for around 25% of national output. A resurgence of the virus recently forced metropolitan Melbourne back into strict lockdowns, while mobility in other parts of the state is restricted.
Virus clusters have also grown in New South Wales, with state border controls still being rigorously enforced.
A strong Australian dollar is also emerging as a threat to the economic recovery. The currency traded at its highest levels since August 2018 this week, with the RBA noting the potential headwind to growth at its monthly board meeting Tuesday.