The Australian “V” shaped recovery

About the author:

Michael Knox
Author name:
By Michael Knox
Job title:
Chief Economist and Director of Strategy
Date posted:
19 January 2021, 9:00 AM

Surprising strength in hours worked in the second half of 2020 suggests surprising strength in GDP. I discuss how the recovery in the Australian economy is unfolding post COVID-19.

Watch the video or listen to the podcast below. You can also read my analysis.

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Listen to the podcast here

 

An esteemed colleague of mine, Dr Brendan Markey Towler, has been telling me about some work he has been doing, looking at the relationship between Australian hours worked, and Australian GDP.

In Figure 1 below, we see the dramatic “V” shaped recovery of Australian hours worked as we move through the second half of calendar 2020. Hours worked refers to total hours worked in all jobs in seasonally adjusted terms.

The data is shown in millions of hours worked. Hours worked peaked at 1.780 billion hours in December 2019. Even as late as March 2020, it held up at 1.777 billion hours. Then came the storm in Australian working hours, inflicted by the Pandemic.

Figure 1: Australian Hours Worked (millions)

Graph showing 'V' Shaped Recovery of Australian Hours Worked (Millions) 2020 

Hours worked slumped savagely to 1.592 billion hours in May 2020. We can see from Figure 1 that this was the low of the cycle. What then happened was the
beginning of a dramatic “V” shaped recovery.

By August, hours worked had risen to 1.685 billion hours. It then stabilised, moving to 1.688 billion hours in September. Then, another surge began. By the time November had come around, hours worked had surged to 1.752 billion hours. This dramatic “V” shaped recovery can be seen clearly in the above chart.

What is really important is what this means for GDP. In Figure 2 below, we see a relationship between seasonally adjusted GDP in millions of dollars and the data
for hours worked that we have just been talking about. Figure 2 shows us that there is a very close relationship between the two since the beginning of 2018.

GDP rises with hours worked up to the end of 2019. Both series then drift in the first quarter of 2020. This period of drifting is then followed by a savage collapse of both hours worked and GDP in the period April and May 2020.

Seasonally adjusted GDP collapses from 497 billion dollars in the December quarter of 2019 to 461 billion dollars in the second quarter of 2020.

Figure 2: Seasonally Adjusted GDP

Graph showing quarterly GDP 'V' shaped recovery in line with Australian hours worked 

Just as there then is a rapid recovery in hours worked, a rapid recovery in GDP also begins. The statistician tells us that GDP recovered to 476 billion dollars in

the third quarter of 2020. This compares to our model estimate of 475.5 billion dollars for September.

The model then suggests that GDP has recovered to 489 billion dollars by November. The estimate of hours worked for December to be released by the statistician in coming days should allow us to provide a model estimate of GDP for the fourth quarter.

Conclusion

Movement in hours worked during 2020 shows that a rapid fall in output was followed by an equally rapid “V” shaped recovery. Our model of GDP, based on hours worked, shows us that a very strong increase in third quarter GDP, should now be followed by an equally strong recovery in the fourth quarter.

The Australian economy is one of the better places to be right now.

Find out more

View more analysis from Michael Knox by clicking on 'economic strategy' in the popular topics list, or listen to his full playlist of podcasts on Soundcloud. Alternatively, contact your Morgans adviser or nearest Morgans branch.

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