Thu. Jan 20th, 2022

Australia’s economy shrank in the third quarter, but the decline was less severe than forecast, raising hopes for a full recovery in the last three months of the year.

Gross domestic product fell 1.9 percent from July to September compared to the previous quarter, the third-largest quarter-on-quarter decline on record, after restrictions on the Delta coronavirus variant weakened demand .

But the decline, which followed four consecutive quarters of growth, predicted expectations of a 2.7 percent contraction by economists polled by Reuters.

Government support has eased the impact on household consumption, with consumer spending booming after restrictions were lifted.

“Households are sitting on savings, businesses have shown resilience and the public sector has done the heavy lifting, covering the Delta disruption and endorsing a smaller-than-expected contraction in today’s national accounts,” said Jo Masters, Oceania’s chief economist at EY, the professional services firm.

“This strength shows in the fact that we will only need 2 percent growth in the December quarter to get the economy back to pre-Delta levels – which is achievable even in the face of Omicron,” she added, with reference to a new coronavirus variant discovered in recent days.

Official data from the Australian Bureau of Statistics showed that growth in the third quarter can be attributed mainly to exports and government spending.

The economy grew by 3.9 percent compared to the same period in 2020, shortly after restrictions were first introduced, down from an annual rate of 9.5 in the second quarter of this year.

Tapas Strickland, director of economics at National Australia Bank, expected a sharp recovery in the last three months of 2021 based on employment data, household consumption and demand in the current quarter.

“There is good reason to expect a very sharp upswing in the fourth quarter and growth back to pre-constraint level,” he said.

The Reserve Bank of Australia has forecast 3 per cent annual growth for 2021.

Australia’s unemployment rate rose to 5.2 per cent in October, but recent payroll data have shown that employment will rise in November and the declines associated with restrictions more than recover.

The economy has already experienced skills shortages and plans to reopen borders for international students and those on work vacations are expected to ease the pressure. But the government has announced that the measures will be postponed until December 15 after the emergence of the Omicron variant.

Contrary to the global economic picture, Australia was not hit by inflationary pressures because wage growth remains weak and the country has not faced high energy costs.

The ABS said the shorter and sharper restrictions implemented from late 2020 had a significantly different impact on household consumption than measures taken earlier in the pandemic.

“The weekly pooled bank data showed that expenditure in discretionary consumption categories decreased when restrictions were imposed, but recovered almost immediately when the restriction ended,” the ABS said.

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