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Australia GDP up 3.4% in Q4 as election looms for Morrison

Consumers help push annual growth to 4.2% but Ukraine war fuels inflation threat

Australia's economy continues to recover from the pandemic, but the persistence of COVID-19 and the Ukraine crisis make the outlook harder to gauge.   © Reuters

SYDNEY -- Australia's economy rebounded sharply last quarter as the country emerged from its most stringent pandemic lockdowns, in welcome news for Prime Minister Scott Morrison ahead of a tough election campaign.

The economy expanded by 3.4% in the three months to December, data from the Australian Bureau of Statistics showed on Wednesday. Economists had forecast a 3.5% rise following the lockdown-driven 1.9% decline in the September quarter.

The economy grew 4.2% over the 12 months to December 2021.

The December quarter's expansion was largely fueled by household spending, as a combination of pent-up consumer demand and festive season sales helped add 3.2 percentage points of growth.

"Consumer spending drove growth in the quarter ... led by the regions emerging from the lockdowns," BIS Oxford Economics' Sean Langcake said. "The surge in consumption was in part aided by a drawing down of savings, but the savings rate still remains elevated at 13.6%, so there is scope for further consumption, which will boost growth in coming quarters."

Uncertainties continue to cloud the outlook, including the future of COVID-19 and the crisis in Ukraine. Yet the strong numbers help underline the resilience of Australia's AU$2.1 trillion economy, which has been among the best performers of the developed countries during the pandemic, thanks to soaring commodity prices and generous government spending.

This led the Reserve Bank of Australia to end its quantitative easing program in February and bring forward the possibility of lifting interest rates from a record low 0.1% later this year. The bank held steady on Tuesday -- with Gov. Philip Lowe flagging the Ukraine war as "a major new source of uncertainty" -- but markets and economists are now predicting a rate increase between June and August.

The growth momentum may also boost the re-election hopes of the country's conservative government as it draws up an early budget later this month, ahead of polls due by May.

Australia's ruling Liberal-National coalition has been under pressure over the government's recent pandemic missteps, which included a slow vaccination rollout last year and lack of testing kits in January as omicron cases peaked.

Opinion polls in the last few weeks indicate the opposition Labor Party has a strong chance of winning back power. But Morrison hopes to stave off the challenge by focusing on his government's strong handling of the economy.

The economic rebound in the December quarter sets the stage for further growth in 2022. Although the spread of omicron is expected to have hurt consumption in January, recent data suggests the impact has been limited.

Consumer and business confidence has held up in recent weeks, the unemployment rate remained at a 13-year low of 4.2% in January, retail sales climbed again in January and core inflation has returned to the Reserve Bank's 2-3% target.

The central bank is predicting the economy will expand by a solid 4.25% in 2022.

A steady pipeline of housing construction and likely strong growth in spending thanks to consumers building up large buffers of savings during the pandemic would be key factors supporting that magnitude of growth, economists say.

Still, the island nation faces headwinds that could hamper that rosy outlook.

Australia's annual wages growth edged up 2.3% on the year in the final three months of 2021, but has failed to satisfy RBA Gov. Lowe's aim of a significant wage increase that will ensure consistency of inflation in the 2-3% range.

Australia's narrowing trade surplus in the December quarter because of rising imports, along with a declining iron ore price, also threatens to take some of the shine off the consumption-driven rebound.

"The biggest economic threat remains inflation. We are likely to see a spike in the price of food and energy products, with global supply chain bottlenecks too being exacerbated by the [Ukraine] war and likely to add even more pressure on inflation," VanEck head of investments and capital markets Russel Chesler said in a note after the data.

He expects the conflict in Europe could reduce pressure on the RBA to tighten interest rates in the first half of this year.

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