Australia Succumbs to Covid-19, Posting First Recession in Three Decades

Australia’s trade surplus declined to A$4.61 billion in July, from A$8.15 billion in the earlier month and lower than Consensus estimate of A$5.40 billion. It was the smallest trade surplus since pre-pandemic February, against the backdrop of extended effect of the Covid-19 pandemic.

While exports slumped 4% m-o-m to A$34.49 billion, the lowest level since April 2018, imports surged 7% to A$29.89 billion, the highest level in four months.

In the first seven months of the year, trade surplus widened sharply to A$46.93 billion, from A$32.69 billion in the comparable period of 2019.

Furthermore, goods and services credits declined A$1.60 billion to $34.496 billion. Also, Goods and services debits increased A$1.939 billion to $29.89 billion. The balance on goods and services surplus decreased A$3.542 billion to A$4.607 billion in July.

The country’s economy underwent a record contraction in the second-quarter, with the rebound from the country’s first recession in roughly three decades negated by Victoria State’s resurgence in Covid-19 cases and subsequent lockdown.

The country’s GDP plunged 7% m-o-m in the second-quarter, reflecting the first sequential quarterly decline since 1991. The GDP contraction was greater than economists’ forecasts for a 6% decline. On y-o-y basis, the economy fell by 6.3% versus 5.1% decrease anticipated by analysts.

The country’s quick removal of prohibitions and reopening of economy is now negated by a near two-month lockdown in Melbourne, the country’s second-largest city with roughly 5 million people, postponing the economic rebound.

The central bank and government are doing all that is possible to support the economy, with the RBA increasing a credit facility to banks earlier this week and the latter continuing with the labor market support package.

Household spending fell by 12.1%, deducting 6.7% from GDP. Also, investment in new and used dwellings declined 7.3% in the second-quarter. However, government spending increased 2.9%, adding 0.6% to the GDP. Interestingly, savings rate jumped to 19.8%, the highest level since 1974.

Back in March, the RBA had slashed interest rate to a record low of 0.25% and fixed the same target for yield of bond maturing in three years. The decision was taken to lower lending costs and propel growth. The central bank anticipates that the renewed lockdown will increase unemployment rate to roughly 10% in 2020.

The government, in the meanwhile, has poured in billions of dollars through the JobKeeper wage subsidy program structured to assist workers remain linked to companies until the resumption of economic activity.

The country had succeeded in avoiding recessions during the 1997 Asian Financial Crisis, Dot Com Bubble and 2008 global financial crisis. The second contract, as mentioned earlier, is the largest on record since the ABS (Australia Bureau of Statistics) started publishing the data in 1959. The country succumbed to pandemic-induced downturn.

On the positive side, China’s stimulus program is acting as a catalyst on commodity prices, enabling Australia to post record current account surplus of A$17.70 billion in the second-quarter. The surge in current account surplus is also aided by international travel prohibitions.

Reflecting the surplus, the Aussie had gained roughly 30% from the lowest level in March. To revive the economy, the country’s central bank has opened A$200 billion worth cheap credit to banks on Tuesday. The RBA has also stated that it will keep the interest rate at the current levels until the economy recovers.