Australia’s stellar economic recovery is under growing threat as Sydney, the country’s largest city, faces the harsh reality of a worsening Covid-19 outbreak that looks likely to extend a three-week lockdown well into August and potentially beyond.
Daily Covid-19 cases in Sydney, a city that accounts for 32% of Australia’s national output, have climbed to their highest levels since March 2020, as authorities have struggled to arrest the spread of the highly contagious Delta variant of the virus.
“The lockdown in Greater Sydney will weigh significantly on economic activity for as long as it is in place,” said Paul Bloxham, chief economist at HSBC Australia.
New South Wales recorded its first death from the virus in 10 months this week, increasing fears around the outbreak, and shattering the calm that had settled on the city after a lengthy period where the virus appeared contained, allowing economic activity to return to normal.
Economists are now weighing the potential hit to the national economy if business activity across Sydney is forced into long-term suspension, lifting unemployment, sapping confidence and keeping borders with other states slammed shut.
A low vaccination rate is also worsening the situation. Only 8.5% of Australians are fully vaccinated, making controls on personal movement the key tool for containing the virus spread. Australia’s performance compares poorly with full vaccination rates in the U.S., the U.K. and Canada at 48%, 51% and 42%, respectively.
Australia’s economy has roared out of the pandemic-induced recession that marked the first half of 2020, riding on a wave of fiscal and monetary stimulus, surging commodity prices and containment of the pandemic.
The rapid bounce in the economy has seen unemployment rates tumble, tightening the job market. In response to the strength of the rebound, the Reserve Bank of Australia said last week that it was beginning a slow withdrawal of alternative policy measures, including a tapering of its quantitative easing program from September.
The New South Wales government estimated that each week of lockdown takes 850 million Australian dollars (US$636.5 million) off national output. The three weeks of lockdown in Sydney have likely knocked 0.13% off GDP so far.
Mr. Bloxham said that if Sydney’s lockdown is as long as the one that crippled Melbourne last year for 16 weeks, the hit to national output would approach 0.7% of GDP.
“If cases cannot be reduced to zero in New South Wales, this presents a challenge for the whole national strategy for managing the Covid-19 pandemic, ” Mr. Bloxham said.
“State borders would need to remain closed while there is zero tolerance in these other states. The trans-Tasman travel bubble would likely remain closed to New South Wales while there is also zero tolerance in New Zealand,” he added.
The lockdown is exacerbating wider problems already faced by Sydney, namely the loss of international tourists due to the closure of borders to foreign entrants and the disruption to the flow of international students to its universities.
Moody’s Analytics has warned that the latest lockdown could be longer and more damaging.
The lockdown is shuttering in around 20% of the country’s population, which looks likely to have a big impact of consumption, a major driver of the recovery in the last year.
Adding to the threat is the sluggish domestic vaccination program, with Australia at the bottom end of its Organization for Economic Cooperation and Development peers, keeping it vulnerable to further infection spikes, Moody’s said.