However, since late June, more than 5 million Sydney residents, or approximately a fifth of Australia’s population, have been ordered to stay at home to help contain an outbreak of the extremely dangerous Delta form of the coronavirus.
The length of the lockdown is unknown, though authorities said on Wednesday that it will be extended for “at least” two weeks until the end of July as the outbreak grew to around 900 illnesses.
“Despite the rapid recovery and robust domestic demand, downside risks remain since Australia’s low vaccination rates, combined with the highly transmissible Delta COVID strain, suggest that the threat of lockdowns will add to the uncertainty,” Citi analyst Josh Williamson said.
Economists worry that the measures won’t be adequate to stop the outbreak, given that officials want to see zero instances in the community before easing restrictions, and just 10% of the population is completely vaccinated.
According to various estimates from analysts, each week of the Sydney lockdown costs the larger economy roughly A$1 billion, with the majority believing that restrictions will be extended until mid-August.
That would indicate a third-quarter economic damage of roughly A$7 billion from a possible seven-week lockdown.
“According to our calculations, the national economy will decrease by roughly 0.7 percent in the September quarter,” said Gareth Aird, Commonwealth Bank of Australia’s head of Australian economics.
The Reserve Bank of Australia (RBA) forecasted 2.25 percent growth for the second half of the year, which now appears overly optimistic, implying that policy will remain loose for the foreseeable future, even as other major central banks tighten.
Last year, the Reserve Bank of Australia reduced interest rates three times, to a record low of 0.1 percent, and started a huge bond-buying program to assist lower borrowing costs.
Given the improving labor market, it announced earlier this month that it would reduce its bond purchases from A$5 billion per week to A$4 billion per week starting in September.
However, experts now expect the lockout to have a disproportionate impact on the job market, as Sydney employs roughly 22% of the nation’s workforce.
The RBA’s government bond purchase program would remain unaltered, according to CBA, despite previous estimates of a cut to A$3 billion per week.
Economists, including those at CBA, believe the RBA may delay interest rate hikes until mid or late 2023, rather than the expected late 2022.
Market pricing has also changed, with three-year government bond yields now at 0.3 percent, down from about 0.5 percent before to the lockout. At A$0.7460, the Australian currency is nearing its lowest level since December 2020.
To be sure, once the limits are eased and more individuals are vaccinated, some analysts are optimistic about a sharp increase in total activity.
“Not only for New South Wales, but for the entire country, the shutdown will be a massive wake-up call,” Westpac chief economist Bill Evans said.
Sydney is the capital of NSW, which accounts for almost a third of Australia’s GDP.
“We had a lot of momentum going into this lockdown. Previous lockdowns have shown that once the lockdown is lifted, recovery is fairly quick “Evans went on to say.
Check out our economic calendar for a complete list of today’s economic happenings.
(1 Australian dollar = 1.3399 dollars)
(Swati Pandey contributed reporting, and Kim Coghill edited the piece.)/n
