Fully Recovered? Australia’s Economy Surpasses Pre-pandemic Levels

Australia's economy is officially above pre-pandemic levels. Economic activity has bounced back in the past two quarters. Data from the Australian Bureau of Statistics (ABS) reveals Australia's Gross Domestic Product (GDP) rose 1.8 per cent in the March quarter of 2021. But will continued State lockdowns see that growth continue?

The news was delivered on June 2nd, in parliament by Josh Frydenberg, Australia's Treasurer:
''Todays national accounts, show that Australian economy is leading the world'' ''The Australian economy is now bigger than it was, going into the pandemic".

The statistic report also points out:

  • Through the year GDP rose 1.1%
  • The terms of trade rose 7.4%
  • Household saving ratio decreased to 11.6% from 12.2%

The AUS200 (ASX SPI 200) index has gained 18% YTD

So, it seems like good news for Australia then. But what economic sectors have been driving the recovery?

Financials

Some of the key players in Australia's financial industry are the Commonwealth Bank of Australia, National Australia Bank, Westpac Banking Corporation.

According to Earnest Young, the faster and stronger than expected recovery in this sector is evident.Cash earnings have increased a total 62% (total of all four major banks) this year to date.

The Fitch Ratings agency also projects the growth in the banking sector to continue for the rest of the year:
"Lower impairment costs will continue to support profit at Australia's four largest banking groups for the remainder of 2021 following the recent round of earnings reports from the banks" Fitch Ratings says.

In contrast, S&P Global predict a tougher 2021, as "their scaled-down operations following a spate of misconduct cases has left them with less cushion against high compliance costs, record low interest rates, elevated loan loss provisions and competition from nonbanks''

Mining and Energy

Australia is a continent considered rich in natural resources. Energy and Mining is a major sector of the economy. According to the Australian Trade and Investment Commission, fossil fuels and precious metals form roughly 50% of the country's exports. Of those, Iron ore and Coal are the most significant, with 30% between them. Oil accounts for 12% of total export, the major companies are BHP Billiton and Woodside Petroleum Limited.

China and Japan are major trading partners and importers of Australian - mined metals. More than 50% of Iron ore, Aluminium and Copper are exported to those two countries alone. When it comes to demand, these factors are to be considered:

  • China's fast post-covid recovery and return to production
  • Electric vehicles and renewable power technologies, both China and Japan are major manufacturers of where demand for metal is high.
  • Infrastructure developments in China and South East Asia driving up demand for Iron Ore, Aluminium, Copper and other metal composites.

These factors have contributed to rising prices of metals and the new commodity supercycle.

As a result, mining companies in Australia have seen growth and a post - Covid recovery. The two major companies in the sector have significant gains on stock prices since the start of 2021. The BHP Group and Rio Tinto had + 10% increase. However, other industry giants Fortescue Metals and Newcrest Mining did not move significantly since January, and are yet to take advantage of high demands for the produce.

Lockdowns continue

However as of July 2021 vaccination rates in Australia have been among some of the lowest in the world, and while the early part of 2021 saw economic growth, at the time of writing nearly half of Australia's 25 million people are living under lockdowns imposed to quell an outbreak of the highly transmissible Delta variant.

How will this impact the economy for the remainder of 2021? Only time will tell.

Kalin Tsenov

Product Specialist

Kalin Tsenov has a strong research background in economics with specific interests in Geopolitics and its impact on the Financial Markets.

He joined FXCM in 2018 after obtaining a Bachelor's Degree from Leeds Metropolitan University. Initially starting as a Business Analyst in the Payment Solutions department, he is currently a Product Specialist in the Firms Product & Strategy department.

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