Australia’s Treasury expects the economy to have shrunk by 3% during the third quarter of 2021, as Covid-19 restrictions across the country throttled economic activity.
The estimates given by Steven Kennedy, secretary to the Treasury, to an Australian parliamentary committee is the first official estimate of the quantum of contraction. The Reserve Bank of Australia and private economists had already pencilled in a drop in gross domestic product (GDP) in the quarter ended 30 September.
“Should GDP fall by 3% in the September quarter that would be the second largest fall in the history of the series,” Kennedy told the Economics Legislation Committee on Wednesday. He added that the largest drop in GDP was the 7% contraction recorded in the June 2020 quarter.
Massive increase in savings
According to Kennedy, there “surprisingly” little commentary about the significance of the contraction of the economy because of the “effectiveness of past and current fiscal interventions”.
The Treasury’s confidence of a swift recovery comes from the massive build-up in savings by both households and businesses.
Data shared by Kennedy stated that household and non-financial business deposits are AUD330bn ($248.33bn) higher than the end of 2019. Of this, household cash savings increased by AUD185bn while business cash holdings increased by AUD145bn by the end of August 2021.
Staff shortages to persist
However, the country is not completely out of the woods. Staff shortages are expected to persist for “months”, Kennedy told the Senate Estimates Committee.
“It is always frustrating for business that reallocation is not instantaneous. It does take some time. People take time over making their decisions because we all know people in a variety of circumstances with partners who are working and have children. It isn’t instantaneous, but it does happen,” he said.
As a result of the tight supply of labour, businesses will need to spend more and according to Kennedy the wage growth will be “not a bad thing”.