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It’s official – Australia has entered it first recession in three decades.
Figures released today show the Australian economy contracted 7.0% in June, after a 0.3% contraction in March – and in just one quarter, more than three year’s growth has been wiped off.
Underpinning this fall is a collapse in household spending and business investment, while government consumption and investment both rose, as did net trade.
But don’t let those trade numbers fool you.
COVID-19 has smashed Australian trade. The combined value of Australia’s imports and exports plunged 17.0% over the year, equivalent to $39.6 billion. Importantly, the fall in imports exceeded the fall in exports, pushing Australia’s trade surplus higher.
As a result, Australia recorded a current account surplus for the fifth consecutive quarter, an extraordinary feat considering our 44 years of current account deficits prior to June 2019.
This result comes as a bit of a surprise given Australia’s large reliance on service exports like education and tourism, which both suffered heavy COVID blows in the June quarter. Many expected these impacts would lead to a decrease in Australia’s trade balance, and were predicting a current account deficit for the June quarter.
Instead, the opposite has transpired due to our imports of services falling further than our exports. This net gain was enough to outweigh our loss in the trade of goods, arising from Australians buying more foreign goods than foreigners buying Australian goods.
COVID-19’s impact on the trade of goods goes against the grain of previous recessions. Australian imports, like consumer electronics, are generally more discretionary than Australian exports, such as industry inputs and food. This usually means that our demand for imported goods falls away.
Yet, it’s more complex this time. The combined effects of a global recession, domestic stimulus and COVID restrictions have supported demand for imported goods as demand for our commodity exports fell, driven by non-rural goods, and predominantly coal.
This collapse in trade isn’t unique to Australia; it is a truly global crisis. Since January, global trade volumes have fallen 17.2%, almost on par with the 18.7% fall experienced during the GFC.
Chart: Global trade volumes
Source: World Trade Monitor
That said, the return to growth in international trade has already begun. Global trade volumes recovered by 7.6% in the June month alone. That same level of trade recovery took a full year in the wake of the GFC.
A fast recovery in global trade volumes is positive news for global economic growth, but while many borders remain closed, international trade will be focused on the movement of goods rather than services, and this will likely speed up Australia’s return to a current account deficit.
David is a macro economist with extensive experience in applied economic and quantitative analysis of the Australian economy, along with considerable experience in labor market analysis. David is a regular commentator on macroeconomic trends, and prepares a weekly economic briefing newsletter.
William is a Graduate Economist working in Deloitte Access Economics’ Macroeconomic Policy & Forecasting team. Prior to joining Deloitte, William completed a Bachelor of Commerce Honours at the University of Melbourne majoring in Economics and Finance.