AAP Finance

Recession looms after Q1 GDP fall

By AAP Newswire

Australia's economy contracted 0.3 per cent in the March quarter, according to new economic figures that make it certain the country will officially be declared in a recession in September.

Growth in gross domestic product grew just 1.4 per cent in the 12 months to March 31 as the economy took a hit from the bushfires and the beginning of the coronavirus crisis, figures from the Australian Bureau of Statistics showed on Wednesday.

The ABS said this was the slowest through-the-year growth since the 2008/09 global financial crisis and captures just the beginning of the economic impact of COVID-19.

"I think it's the sort of story we were anticipating," said St George chief economist Besa Deda.

"It looks a lot better than some of the other economies around the world and better than what economists had anticipated earlier," Ms Deda said.

Australia's 0.3 per cent economic downturn in March was much smaller than the 1.3 per cent drop the US experienced, or the 2.0 per cent contraction in the UK and 3.8 per cent in the eurozone areas, Ms Deda said.

The Australian dollar jumped on the news, rising to a five-month high of 69.84 US cents, but had eased to 69.40 US cents by 1430 AEST.

With Australia's economy guaranteed to shrink in the current quarter - economists say likely the most severe contraction since the Great Depression - it's now certain that Australia will officially record its first recession in three decades when the next GDP figures are released in September.

Economists define a recession as two consecutive quarters of economic contraction.

"Today's data confirmed the pandemic pushed the economy into a deep recession in March," said NAB economist Kaixin Owyong, who is expecting a "massive" 8.4 per cent fall in June quarter GDP.

"Interesting that it took a healthy emergency to break the record economic expansion," Mr James said.

While Wednesday's numbers were Australia's first quarterly economic decline since March 2011, at the height of the European debt crisis, economists took heart that the contraction wasn't worse.

"The economy was hit by bushfires, drought, cyclones, flooding and a global pandemic and only fell 0.3 per cent," CommSec chief economist Craig James said.

Some economists had believed there was an outside chance the readout would be flat or positive, allowing Australia the chance to extend its unprecedented run of more than 29 years without a recession.

Westpac economist Andrew Hanlan said the key downside surprise in Wednesday's figures was that consumer spending dropped 1.1 per cent, detracting 0.6 percentage points from GDP.

"While retail rose, spending in other areas was hard hit by the pandemic," Mr Hanlan said.

While spending on goods rose - notably on food, medicine and home office equipment - spending on services such as travel, dining and recreation fell sharply, by 1.9 per cent overall in the biggest decline since the 1980s.

Home-building dropped 1.7 per cent and business investments fell 0.8 per cent.

Overall, private demand subtracted 0.8 percentage points from GDP while public demand contributed 0.3 per cent percentage points to it, with government spending rising 1.8 per cent as authorities responded to the bushfires and the COVID-19 pandemic.

BIS Oxford Economics chief economist Sarah Hunter said she expected the decline in first-half GDP to be "relatively small when compared with other economies - we now expect the peak to trough fall in GDP to be significantly less than 10 per cent".

"It's still going to be substantial," she said.