Has Australia's economy moved from recession straight into a boom?

Australia’s impressive economic recovery from the COVID-19 recession was further confirmed with the strong 1.8 per cent rise in March quarter GDP. This followed unprecedented growth of 3.2 per cent in the December quarter and 3.5 per cent in the September quarter of 2020.

Economic output is now higher than it was before the COVID-19 recession hit, with easy monetary policy, booming commodity prices, demand for resources from the rampant Chinese economy and fiscal policy stimulus all playing a part.

While COVID-19 lockdowns remain a threat to growth, other growth drivers remains clearly directed at the economic expansion continuing until well in to 2022.

Commodity prices are extraordinarily strong. In Australian dollar terms, the RBA index of commodity prices has risen by more than 30 per cent since July 2020 and in monthly terms, are at the second highest level ever seen.

This is providing a huge income boost to Australian resources companies and it is feeding into a positive outlook for business investment and employment. Australia is a clear winner when commodities boom.

Based largely on Australia’s trade and export links to the fabulously strong Chinese economy, export volumes remain favourable. This is likely to continue for at least the near term, a point made even better by the high prices being paid for these commodities.

The household sector is also benefiting from a surge in wealth – note the ASX level and house price growth – both are key factors making Australians richer.

Research shows that when individuals have a sharp and sustained rise in their wealth, they tend to increase their spending. This is because they can divert part of their income from savings towards consumption – with the rising asset prices are doing the longer run saving for them.

The economic recovery is also feeding into a recovery in the labour market with the unemployment rate on track to dip below 5 per cent in late 2021 or early 2022. This confidence boosting trend is also feeding into what looks like a long overdue lift in wages which will further boost confidence and spending.

The GDP figures also showed an encouraging lift in private sector business investment, which rose 3.6 per cent in the March quarter after an increase of 2.3 per cent in the December quarter.

The long awaited and long overdue upswing in business investment is with us and this is certain to underpin growth over the next year. Business investment expectations are particularly strong.

What now for the RBA?

The RBA is no doubt delighted with the economic recovery – the speed of the pick up and the employment recovery are much stronger than it, or indeed most economists, were thinking even a few months ago.

Earlier this week, the RBA stuck to its script when it said that the current emergency 0.1 per cent cash rate would remain in place until at least 2024, a time when it was likely that the economy will be in full employment, with wages growth strong and inflation entrenched near 2.5 per cent.

This may yet be the case, but another 6 to 12 months of unexpectedly strong growth and an earlier lift in inflation and wages pressures would require a major rethink 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 close to full strength and it was, for the first time in a decade, meeting its goals for full employment and inflation?

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