Sydney’s lockdown could stretch on into October, economists warn, as the recovery starts looking rocky

Sydney’s lockdown could stretch on into October, economists warn, as the recovery starts looking rocky
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  • Sydney’s lockdown extension on Wednesday won’t be the last, economists predict, as New South Wales battles to get on top of its current COVID-19 outbreak.
  • The fallout will see as many as 300,000 jobs lost and the national economy contract by 2.7% this quarter, according to Commonwealth Bank economists.
  • ANZ expects a more mild impact, but says the lockdown will not be finished until the end of September.
  • Visit Business Insider Australia’s homepage for more stories.

Australia’s largest city will be locked down for even longer as New South Wales struggles to get on top of its latest COVID-19 outbreak, with the ramifications to be felt far beyond state limits.

Premier Gladys Berejiklian announced on Wednesday that Sydney will spend at least another four weeks under stay-at-home orders, while specific hotspots will be subject to even tighter restrictions.

The decision pushes the Harbour City into its third month of lockdown. Economists warn Australia’s V-shaped recovery is now at risk of derailing, with further extensions likely on their way.

“Sydney’s lockdown looks likely to be deeper and longer than we initially estimated, and we now anticipate tight restrictions to continue until at least the end of September,” Felicity Emmett and Catherine Birch, senior economists at ANZ, said on Wednesday. 

The projection sees Australia’s third largest retail bank drastically downgrade its forecasts. It  now expects the national economy to shrink by 1.3% by September 30, having previously anticipated modest growth.

It had expected as many as 60,000 New South Wales workers to lose their jobs as a result of the initial lockdown, but now says more could now be stood down. 

CBA: Unemployment will spike again

The Commonwealth Bank has an even grimmer view, as its economists brace for a 2.7% contraction and as many as 300,000 job losses. Under this more pessimistic view, unemployment will actually rise to 5.6% after falling to 4.9%. 

“It is the inevitable consequence of shutting down large parts of the economy. Employment will fall and unemployment will rise,” CBA head of Australian economics Gareth Aird said.

“The NSW economy will contract heavily over [the third quarter] as restrictions to limit the spread of the virus reduce the production of goods and services.  In contrast, the rest of Australia is likely to expand modestly, subject of course to any further COVID‑related [disruptions].”

Longer term CBA has unemployment finishing the year at 5.2%, while ANZ still believes it is headed for 4.5%.

The divergence in opinion stems from ANZ’s belief that hours, rather than jobs, will bear the brunt of the lockdown.

“We expect a much larger fall in New South Wales’ hours worked than in employment. We also expect underemployment to rise sharply and participation to fall, particularly given the suspension of mutual obligations. This will also mitigate the impact on the NSW and national unemployment rate,” Emmett and Birch said, anticipating it to only slightly slow the labour recovery.  

This is all part of ANZ’s new base case that assumes construction still gets the green light to recommence on July 31, albeit with some limitations, but that households remain restricted into at least October.

“The risks to the outlook are tilted to the downside. Given the much greater transmissibility of the Delta variant, the possibility of a longer lockdown in Sydney or further contagion into other states is significant.”

Spending will be the biggest casualty, with the latest data showing the Australians nationally have tightened their belt like they haven’t since April 2020, before JobKeeper and other support measures were rolled out.

More financial support will be needed

The hit to businesses will almost certainly see policymakers step in, as they try to keep the wheels of the economy turning and guarantee another rebound on the other side of the current outbreak.

Already the first steps are being taken, as Victoria ended its state-wide lockdown and looks to replace the emergency federal payment scheme.

On Wednesday, a $400 million Victorian support package was announced, to be funded by both state and federal governments. 

Impacted businesses will receive assistance in the form of $5,000 grants, while hospitality venues will be eligible for payments of up to $20,000. Commercial and residential landlords will also receive $80 million should they provide rental relief to tenants.

Clearly none of that will help Sydney businesses and households. For that, economists suspect the federal government may need to increase or extend the up to $600 emergency payment scheme, temporarily boost JobSeeker, or rejig the JobSaver program.

The RBA could equally extend its quantitative easing (QE) program, or at least delay tapering it under the new flexibility the central bank has granted itself.

While economists are more upbeat about Australia’s medium term recovery, it is clear the lockdown will throw a spanner in the works more immediately. 

“We retain our view that economic outcomes will be very strong next year,” Aird said.

“But we expect a very substantial hit to GDP and employment in [the third quarter] which will mean that it will take longer for wages growth to lift towards the 3% mark that the RBA deems necessary for inflation to sit ‘sustainably’ within the target band.”

“As such, the rate hike trigger is unlikely to be pulled in late‑2022 as we previously expected.”

With ending Sydney’s lockdown now the number one economic priority, there’s now even greater pressure on the Morrison government to get the health policy settings right. 

“Assuming no further outbreaks, activity should begin to recover in [the fourth quarter], but it is clear that to maintain normal operating conditions the vaccine rollout must be significantly progressed,”  Sarah Hunter, chief Australia economist for BIS Oxford Economics, said.

But as Sydney’s lockdown wages on, and potential outbreaks need to be controlled elsewhere, it’s certain more financial support will be required if Australia is to quickly bounce back, again.