Dr Brendan Rynne, KPMG Chief Economist, explains how February 29 will add $5.2 billion to Q1 GDP.
The Australian economy is stuttering at the moment. Underlying structural problems like weak wages growth, high household debt, and now slowing commodity prices are being compounded by extraordinary events such as drought, bushfires and the coronavirus. My fellow economists are speculating about negative growth in the March quarter.
But they may have missed one key point – a quirk in the Gregorian calendar, which gives us 29 days in February this year.
2020 is a Leap Year and the extra day’s GDP will add around $5.2 billion to the economy for this year’s national accounts. That should be enough to ensure that the March quarter will not fall into negative territory.
While there is an underlying weakness in economic activity consistent with potentially negative growth, the addition of February 29 into this year’s calendar may in fact mean that Australia – and possibly many other countries that follow the United Nation’s System of National Accounts – will not see this result in the March quarter 2020.
The extra day of GDP is not explicitly adjusted for by the Australian Bureau of Statistics, as economic activity is not normally addressed on a per day basis. This is mainly because it brings up issues like 'how many business days are in each month/quarter and how does this compare to last month/quarter?' (which in fact is becoming less of an issue as working patterns change and the use of technology means we are working differently today than we did 5 or 10 years ago) – but for this discussion we need to.
The March quarter in each leap year includes an extra day of economic activity – 91 in total. The other 3 years out of every four sees the March quarter with 90 calendar days, which compares to 91, 92, and 92 calendar days for the June, September and December quarters respectively.
Seasonally-adjusted real GDP in the September Quarter 2019 was $477.2 billion. This equates to about $5.2 billion of GDP per calendar day, and is roughly consistent with average GDP per calendar day since the beginning of 2018.
Also, over the last two years, seasonally-adjusted real GDP has grown by about $2.5 billion each quarter. So if growth in economic activity in the current quarter is equal to the average quarterly growth for the past two years, then we would expect to see the March quarter 2020 about $7.5 billion larger than the December 2019 quarter – that is, average growth plus the 'extra day' of GDP.
For the March quarter to hit negative growth territory, conditions in the economy would have to be sufficiently bad that the average growth of $2.5 billion of GDP evaporated, as did the 'extra day' of GDP. In reality this means about $7.5 billion of value added would need to fall out of the economy. This is almost impossible.
To put it in context, the sectors probably most vulnerable to the current extraordinary events are accommodation and restaurants, air transport, education and training, retail and other services sector. These five sectors combined contributed around $64 billion in Gross Value Added in the September Quarter 2019, which represented around 13 percent of GDP (or $475 billion) for the quarter. For those sectors to lose $2.5 billion in value added, they have to contract by a collective 4 percent.
This would be a very significant drop – the most these sectors have fallen in recent times is a combined 0.9 percent between the June and September quarters in 2009; the height of the GFC. But for them to drop $7.5 billion (normal momentum + extra day), they have to drop 12 percent in a quarter. That is not going to happen.
So while speculation about negative growth is understandable, the impact of the Gregorian calendar on our national accounts statistical framework means it is less likely to occur.
This technical outcome will not change the experiences of households and businesses in the current economic environment – the economy feels weak because it is weak. But if the March quarter number is negative it will confirm that we have a bigger problem to deal with than we thought – even if it is masked by a statistical anomaly in calculating the level of economic activity.
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