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Australia is technically out of a recession however this does not mean Australia’s recovery will be smooth-sailing.
At a Senate estimates hearing on Tuesday, RBA deputy governor Guy Debelle revealed that Australia’s economy grew in the September quarter. When asked about Victoria’s economy by Senator Bridget McKenzie, Dr Debelle surmised that Victoria’s economy appeared to have fared better than expected.
However these figures are beset by uncertainty.
“The range of uncertainty around the numbers at the moment is as large as it has been in my career,” said Dr Debelle at the hearing.
Things are not back to normal
A recession is defined as two or more consecutive quarters of contraction in GDP.
In the March quarter this year, the economy shrank by 0.3 per cent and in the June quarter it shrank by 7 per cent.
Growth in the September quarter now places Australia outside the definition of economic recession.
However Sarah Hunter, Chief Economist at BIS Oxford Economics, warns that slight growth is not indicative of a return to economic normalcy.
“Equally (and rather obviously) the exit from recession should not be read as things are back to normal,” said Ms Hunter.
“The economy returning to growth is a positive, but there is a long way to go before we recover to pre-COVID levels of output; our estimates suggest that output is still around 5 per cent lower than it was at the end of 2019, and by historical comparison this is a very large gap to make up.”
Moreover, persisting uncertainty will keep businesses in a tenuous position for many months to come.
“Office and retail construction projects are being put on hold or cancelled … spending patterns have shifted … and the closure of the international border and hit to overseas migration is also putting a drag on expansion plans,” said Ms Hunter.
“So businesses that are exposed to these activities may become vulnerable in the coming months as demand for their services weakens, and given that other parts of the economy (such as tourism) will not be able to return to normal for some time yet it will be a long path back.”
Stephen Halmarick, Chief Economist at CBA, said that this means the RBA, who meets next Tuesday to dispense further monetary stimulus, and the Government must continue to fund Australia’s economic recovery.
“The inflation numbers this week reinforce the view that there’s a lot of spare capacity in the economy. So Government fiscal support and RBA monetary support, which we think we’ll get a lot of on Tuesday, are important to keep the recovery going,” said Mr Halmarick.
The RBA will release their formal forecasts next Friday in their Statement on Monetary Policy.
An ‘uneven and bumpy’ road to recovery
Although Australia’s economy has taken a considerable hit during the pandemic, Mr Halmarick is optimistic about Australia’s recovery.
“It’s going to take some time before the economy is back to the same size it was pre-COVID-19. We think we’ll have to wait until early 2022. But the good news is that the recovery is under way,” said Mr Halmarick.
“It will be uneven and bumpy, and there’s a long way to go, but we’re heading in the right direction.”
Nevertheless, businesses must view the recovery with a focus on their specific industries.
“Different sectors of the economy will experience different paces of recovery. Businesses in different industries will need to keep a close eye on what’s happening in their industry,” said Mr Halmarick.