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Delta-driven economic hit could be worse than expected, fuelling Omicron fears
By Jennifer Duke and Shane Wright
Strict lockdowns to stop the spread of the Delta strain of COVID-19 may have hit the economy harder than expected, fuelling fears the recovery from the pandemic could be derailed by the new Omicron variant.
A 1.9 per cent rundown in business inventories as companies struggled to get stock into the country, revealed by the Australian Bureau of Statistics, prompted some analysts to warn the overall economic contraction could be larger than expected.
Ahead of the release of the data, the market expectation was for inventories to remain unchanged and for Wednesday’s GDP figures to reveal a 2 to 3 per cent economic contraction over the September quarter, due to lockdowns in major cities.
Company gross operating profits were up 4 per cent over the quarter supported by state and federal government stimulus. Wages and salaries fell 0.8 per cent, with states in lockdown over the period particularly hard hit.
Following the release of this first set of data for the week feeding into GDP figures, Commonwealth Bank economists held firm on their expectation for a 3.5 per cent drop in the September quarter. This would make it the second worst quarter on record. Inventories may have contributed about 0.7 percentage points to the decline.
Barclays is expecting a 2.7 per cent contraction, but considers the large drop in inventories to be a “downside” risk.
NAB has also maintained its forecast for a 3.8 per cent contraction, noting the latest data supports a weaker quarter than the consensus is expecting. In particular, a 3.5 per cent quarterly fall in real total sales and the inventories result have given the bank’s economists confidence the quarter was worse than generally anticipated.
NAB economics director Tapas Strickland said the size of the contraction was now a “moot point” post-lockdown, but he was cautious about the outlook.
“The recent emergence of the Omicron variant though is a significant risk to the rebound and it is too early to assess how severe the variant is and whether current vaccines provide a high level of protection,” he said.
KPMG Australia chief economist Brendan Rynne was also expecting a 2.6 or 2.7 per cent contraction, but said he was concerned developed countries now think the pandemic was behind them.
”Advanced economies seem to look at COVID in a rear-view mirror,” Mr Rynne said. “From a global perspective it is far from over.
“Our GDP is bouncing back, a large proportion of the population is vaccinating ... but precisely what we are seeing with Omicron is why we should be worried,” he said, noting the current variant might not be the one that pushes the world back into lockdown, but further mutations were possible.
Modelling from KPMG warns of a $30 billion economic hit in Australia by the end of 2022 if a variant takes hold leading to restrictions and slowing international trade. The jobless rate would be pushed up to 6 per cent, leaving more than 180,000 people in the unemployment queue.
This modelling was undertaken a month ago and related to any variant with significant health consequences resulting in government intervention. The health implications of Omicron are currently unclear.
A delay in reaching an international 80 per cent double dose rate could result in a global economic hit worth 1 per cent of worldwide GDP on the KPMG estimates.
“Advanced economies need to help get the rest of the world vaccinated. Despite places like Australia having high double vaccination rates you’re still relying on the weakest link in the global health system,” Mr Rynne said.
While businesses are now in recovery mode with lockdowns eased, there are jitters about the potential effects of the new variant.
Australian Chamber of Commerce and Industry chief executive Andrew McKellar also said an overreaction from any level of government would be “devastating” at a time when businesses need a Christmas boost.
“Fears that there may be further restrictions coming down the track is likely to increase uncertainty and has the potential to derail our post-pandemic recovery.”
Ai Group chief executive Innes Willox said closing borders or making snap decisions at a time when there was a shortage of skills and labour would exacerbate the economic difficulties facing employers.
“We need to avoid jumping at shadows as every new COVID variant appears,” Mr Willox said.
Business Council of Australia chief executive Jennifer Westacott warned about rushing to react to the variant following a tough two years.
“The community needs nationally consistent rules and triggers for locally targeted containment. We cannot afford another two years of unsustainable stop-start lockdowns and restrictions,” she said.
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