Lengthening Sydney Lockdown Risks Australian Economy Going Into Reverse

Extension of the pandemic-related lockdown in Sydney threatens to throw Australia’s economic recovery into reverse in the third quarter, driving up unemployment and dashing what has proved to be widespread over confidence in the community that Covid-19 had been contained.
New South Wales Premier Gladys Berejiklian announced Wednesday that the lockdown would be extended by two weeks, taking the lockdown to five weeks in total, with stubborn daily case numbers leaving many with the sense that the clamps on personal movement and the disruption to business will stretch on.
The lockdown is already crunching business confidence. The National Australia Bank reported Tuesday that business confidence fell 9 points in June from May to +11 index points. The data only caught the start of the Sydney lockdown which was originally expected to run for just two weeks. Economists warn that much worse is coming in the July reading.
With Sydney accounting for around 25% of national output, each week of the lockdown shaves $1 billion Australian dollars (US$744.8 million), or 0.2 percentage points from national output, said Gareth Aird, head of Australian Economics at the Commonwealth Bank of Australia.
If the lockdown extends to seven weeks, something that isn’t ruled out given the rapid spread of the highly-contagious Delta variant of the virus, around 1.4 percentage points would be slashed from GDP growth, forcing the economy to contract for the first time since the second quarter of 2020, he said.
The health crisis is increasing the risk of worker stand downs in Sydney. With Sydney accounting for nearly a quarter of Australia’s total workforce, the threat of stand-downs could see the national unemployment rate rise, Mr. Aird said. Some offset to Sydney’s downturn would come from rising employment in other states that are free of lockdowns for now, but that impact would fade if Sydney’s disruption runs for months.
On the bright side, government support payments to those who have lost work will act as a cushion for the state economy, setting up the prospect of a rapid rebound in activity once the health crisis is contained, he said.
A long and damaging lockdown would also reshape the policy outlook for the RBA, Mr. Aird said.
CBA had been forecasting that the central bank would announce a further reduction to its weekly bond buying program in November from A$4 billion to A$3 billion.
“At this stage, we will keep our RBA call on the bond buying program unchanged, but it hangs in the balance,” Mr. Aird added.
A jump in cases in Victoria, Australia’s second biggest state, will also be a deep source of worry over the coming weeks for those charged with containing the spread of the virus.

Source: WSJ

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