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Australian economic storms coming as Covid recovery turns into a ‘V’

Shoppers are walking around the Sydney shopping center early this year. (AP photo)

Sydney: The Australian economy expanded much faster than expected in the fourth quarter of last year and all indications are that 2021 has started on a steady basis also supported by massive monetary and fiscal stimulus.

Data from the Australian Bureau of Statistics (ABS) showed the economy accelerated 3.1% in the three months to December, above expectations for a 2.5% rise and followed by an upwardly revised 3.4% increase in the third quarter.

Despite the best consecutive growth periods ever, annual production continues to contract by 1.1%, highlighting the chaos caused by the Coronavirus pandemic and indicating the continuing need for policy support for the A $ 2 trillion economy.

The Australian dollar rose about 10 points to a day high of $ 0.7836 after the data, while bond futures fell with a three-year contract which indicates a yield of 0.3% compared to the official cash rate of 0.1%.

The “V-shaped” nature of recovery is everywhere “Economic growth, labor market, retail spending, and the housing market,” said Craig James, Sydney-based chief economist at CommSec.

James expects the economy to recover by 4.2% in 2021.

Data on major banks’ credit and debit card spending as well as official figures for retail sales, employment and construction activity point to a strong start to the year.

Marcel Thiliant, an economist at Capital Economics, expects GDP growth of 4.5% in 2021, “which means that allowing a decline in net migration due to border closures, the economy will not suffer from a permanent decline in production as a result of the pandemic.”

Still required

The Australian economy has performed better than its rich-world counterparts thanks to the extremely low community transmission of Covid-19 combined with massive and timely fiscal and monetary stimulus.

Its economic output decreased by 2.5% in 2020, which is well below the 10% decline in the United Kingdom, down 9% in Italy, 5% in Canada and more than 3% in the United States.

“Our economic recovery plan is working, and the national accounts today are testimony to that fact,” Treasury Secretary Josh Friedenberg told a news conference. I added “Mission not finished.”

“There are challenges ahead. But you don’t want to be in any other country except Australia with the start of 2021.”

To help mitigate the economic shock from pandemic-induced lockdowns, the Reserve Bank of Australia (RBA) cut interest rates three times last year to a record low 0.1% and launched an unprecedented program of quantitative easing.

The government announced a wage subsidy plan to keep people in jobs while banks are delaying home loan payments and cutting borrowing rates to help boost credit growth.

On Tuesday, the Reserve Bank of Australia reinstated its commitment to maintaining three-year yields at 0.1% until employment and inflation targets are met, something policymakers do not expect until 2024 at the earliest.

In fact, data on Wednesday showed that there was no domestically driven inflation in the economy with the largest price hikes coming from commodity exports.

The Reserve Bank of Australia has repeatedly said that the unemployment rate should fall to around 4% from above 6% now to help push wage growth above 3% and for inflation to return to its 2-3% target range.

“The stimulus and support measures are still very much needed,” said James of CommSec. “The surplus capacity will remain in the labor market for a few more years, with the liquidity ratio kept constant at 0.1%.”

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