Australia’s impressive economic recovery from the COVID-19-related recession was confirmed by the sharp 1.8% increase in GDP in the March quarter. This follows unprecedented growth of 3.2% in the December quarter and 3.5% in the September 2020 quarter.
Economic output is now higher than it was before the COVID-19 recession, with accommodative monetary policy, booming commodity prices, soaring demand for resources from the Chinese economy, and measures stimulus all play a role.
While COVID-19 lockdowns remain a threat to growth, other growth drivers remain clearly oriented towards the economic expansion that will continue until 2022.
The prices of basic commodities are extraordinarily high. In Australian dollars, the RBA commodity price index has risen more than 30% since July 2020 and, in monthly terms, is at the second highest level on record.
This dramatically increases the revenues of Australian resource companies and fuels a positive outlook for business investment and employment. Australia clearly wins when commodities explode.
Based largely on Australia’s trade and export links with the fabulously strong Chinese economy, export volumes remain favorable. This is likely to continue at least in the short term, a point even more marked by the high prices paid for these commodities.
The household sector is also benefiting from an increase in wealth – note the level of the ASX and the growth in house prices – both are key factors making Australians richer.
Research shows that when people have a strong and sustained increase in their wealth, they tend to increase their spending. This is because they can divert some of their income from savings to consumption – as asset prices rise, they save for them longer term.
The economic recovery is also fueling a labor market recovery, with the unemployment rate on track to fall below 5% in late 2021 or early 2022. This confidence-building trend is also fueling what appears to be a long overdue wage hike, which will further boost confidence and spending.
GDP figures also showed an encouraging increase in private sector business investment, which rose 3.6% in the March quarter after rising 2.3% in the December quarter.
The long-awaited and anticipated recovery in business investment is with us and it is sure to support growth over the next year. Business investment expectations are particularly high.
What now for the RBA?
The RBA is undoubtedly thrilled with the economic recovery – the speed of the recovery and the recovery in employment is much stronger than it, or indeed most economists, even thought a few months ago.
Earlier this week, the RBA stuck to its scenario when it said the current 0.1% emergency cash rate would remain in place until at least 2024, a period when it was likely that the The economy is in full employment, with strong wage growth. and inflation stood at nearly 2.5 percent.
It may still be, but another 6 to 12 months of surprisingly strong growth and a faster rise in inflation and wage pressures would require a major overhaul from the RBA.
And wouldn’t it be a good thing if, around this time next year, the RBA hiked interest rates because the economy was near full strength and hit, for the first time in a year, decade, its full employment and inflation targets? ?