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Lucky it’s a leap year: Bonus day to boost GDP
The addition of just one extra day is being forward-praised for providing the Australian economy with enough added time to ensure positive growth occurs across the March quarter.
Lucky it’s a leap year: Bonus day to boost GDP
The addition of just one extra day is being forward-praised for providing the Australian economy with enough added time to ensure positive growth occurs across the March quarter.
Insight from KPMG’s chief economist, Dr Brendan Rynne, is predicting 29 February to add $5.2 billion to 2020’s first quarter GDP.
Acknowledging the Australian economy as “stuttering”, Dr Rynne said underlying structural problems like weak wages growth, high household debt and now slowing commodity prices are all being compounded by extraordinary events such as drought, bushfires and the coronavirus.
But despite recent speculation around negative growth for the quarter, the economist is expecting the “quirk” of the leap year to provide enough of a buffer to prevent it from falling into negative territory despite the economy’s “underlying weakness”.
Dr Rynne outlined that the extra day of GDP is not explicitly adjusted for by the Australian Bureau of Statistics; 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,” he said.
“But for this discussion, we need to.”
This is because the March quarter in each leap year includes an extra day of economic activity – 91 in total.
On the other hand, “the other three 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”, Dr Rynne explained.
Over the last two years, the economist noted that seasonally adjusted real GDP has grown by about $2.5 billion per quarter.
Highlighting the calculation, the economist outlined that “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.
To hit negative growth territory in the March quarter, “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”, the economist flagged.
In reality, Dr Rynne commented that “this means about $7.5 billion of value added would need to fall out of the economy”.
“This is almost impossible.”
While a number of sectors are “vulnerable” to current events – such as accommodation and restaurants, air transport, education and training and retail – these sectors only represent around 13 per cent of the total GDP.
“For those sectors to lose $2.5 billion in value added, they have to contract by a collective 4 per cent.”
According to the economist, “this would be a very significant drop – the most these sectors have fallen in recent times is a combined 0.9 per cent”.
This occurred at the height of the global financial crisis back in 2009.
“But for them to drop $7.5 billion (normal momentum and an extra day), they have to drop 12 per cent in a quarter,” he explained.
“That is not going to happen.”
Despite this, speculation around negative growth is understandable, according to Dr Rynne, where the “technical outcome will not change the experiences of households and businesses in the current economic environment”.
“The economy feels weak because it is weak.”
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