Further extensions to the Sydney lockdown could push Australia into recession, economists warn

Further extensions to the Sydney lockdown could push Australia into recession, economists warn
Sydney could cause another recession as the city's lockdown wages on. (Hu Jingchen, Xinhua via Getty Images)
  • Australia could find itself in recession once again if Sydney’s lockdown is further extended, economists said.
  • Two more months of stay-at-home orders would be enough to cause the national economy to contract for two consecutive quarters, a majority of respondents to a Finder economist survey said.
  • Yet most are upbeat about Australia’s broader economic recovery, expecting unemployment to continue falling despite the disruption.
  • Visit Business Insider Australia’s homepage for more stories.

Almost two out of three economists say Australia’s recovery is faltering and could turn into another recession, as they brace for Sydney restrictions to remain.

With Sydney representing a third of the national economy, and with daily cases still north of 200, many believe the current lockdown will reverse much of Australia’s recovery so far.

Of 30 economists in a Finder survey released on Monday, 19 believed there was the real possibility of Australia entering a recession.

Characterised by two consecutive quarters of negative growth, the country looks set to record one at least. The economics team at the Commonwealth Bank anticipates the economy will shrink by 2.7% over the September quarter. ANZ likewise is calling a 1.3% contraction, both as a direct result of the Sydney outbreak.

The prospect of the country receding even further depends on whether restrictions are extended beyond the end of August. Two out of five economists expect locking down Sydneysiders for two more months, to the end of October, would do the trick.

Whether or not a recession happens is anyone’s guess, and depends greatly on whether the more transmissible Delta strain can be controlled in the coming weeks.

“Assuming the lockdowns are effective by September, the economy should then rebound in Spring, especially if government support measures are increased — in line with the severity of the necessary restrictions, to protect jobs,” Bendigo Bank economist David Robertson said.

“Longer term, our recovery should be strong enough to mean the RBA will increase interest rates in [financial year ’23], but for now the focus is on the New South Wales lockdowns and ensuring that measures are effective, to protect the community.”

Regardless of whether it causes a recession, lockdowns – which at one point required one in two Australians to stay home – have well and truly thrown a spanner in the works.

Matthew Peter, chief economist at Queensland’s investment arm QIC, expects the outbreaks will force the RBA to reconsider tapering its QE program, potentially extending it beyond November.

The prospect of the central bank handing down a rate hike before 2023 also seems distant, as CBA withdraws its bold prediction of a 2022 move higher.

But while doubts have crept into Australia’s immediate economic outlook, there is still plenty of confidence in the medium-term future.

Former Treasury economist Saul Eslake reaffirmed he expects Australian unemployment to be slashed to 4.5% by the middle of next year, restoring the economy to “full employment” and laying the groundwork for wage growth.

The latest job ad data out on Monday shows vacancies fell for their first time in 14 months. Yet marking just a 0.5% reduction, the fall reinforced ANZ economists’ view that lockdowns will slash hours worked but will have a minimal impact on wider employment.

Consumer confidence similarly appears reasonably resilient, according to CBA head of Australian economics Gareth Aird.

“There appears to be a clear sense amongst households that whilst the economic shock will be severe, it will be short lived and activity and employment will bounce once the lockdown is over.,” Aird said in a separate note on Monday.

As a result, Aird said there was “unlikely to be any material shift” in the property market, as prices continue to rise strongly.

If lockdowns do wage on for months yet however, such resolute confidence may be shaken yet.