Economy back in recession as lockdowns bite: CBA

Australia is back in recession as Covid-related lockdowns push activity into a big third-quarter contraction, according to the Commonwealth Bank.

Retail sales slumped 8.9 per cent in NSW in July as Sydney remains under harsh Covid restrictions. Picture: NCA NewsWire / Nicholas Eagar

Australia is back in recession as Covid-related lockdowns continue to cripple activity in key states, with the economy expected to show one of its biggest contractions on record in the third quarter, according to the Commonwealth Bank.

The big mortgage lender on Friday lowered its expectations for national output in the three months through September, forecasting gross domestic product to fall 4.5 per cent from the previous quarter. A few weeks ago, CBA’s forecast was for the economy to contract 2.75 per cent.

“For all intents and purposes the Australian economy is currently in a manufactured recession as we go through another huge negative shock,” said Gareth Aird, head of Australian economics at CBA.

CBA’s downgraded outlook comes as data shows retail sales collapsed in Sydney in July as lockdowns were extended and cases of the Delta variant rose swiftly, spreading to regional areas of NSW soon after.

CBA spending tracker

Based on current estimates, the lockdown of activity in Sydney, which accounts for about one-third of national output, could extend into November as the state government races to boost vaccination levels.

With Victoria also in lockdown, more than half of Australia’s population is affected by constraints.

Retail sales fell 2.7 per cent in July, with sales in NSW tumbling 8.9 per cent, the largest decline by any state since last August, according to the Bureau of Statistics.

Mr Aird said more than half a million workers have already been furloughed due to the return of lockdowns, with the unemployment rate set to rise to 5.3 per cent by the end of the year from 4.6 per cent in July.

As economists downgrade expectations for the economy, data next week from the statistics bureau is expected to show activity in the second quarter was also soft.

For most of the second quarter, the economy was doing well, according to Mr Aird. But the Delta variant arrived in NSW in late June and the subsequent Covid-19 outbreak “changed the game for the Australian economy”.

There is some risk that the economy shrank in the second quarter, guaranteeing a technical recession, or two consecutive quarters of economic contraction.

“Such an outcome would rubber stamp that the Australian economy is in recession,” he said.

The deteriorating environment has set the stage for the Reserve Bank’s next policy meeting on Sept. 7, with the central bank poised to consider suspending the planned taper of its government bond buying program.

The RBA in July said it would begin the process of withdrawing monetary policy stimulus, but that was before the extent of the U-turn in the economy was able to be fully appreciated.

The RBA’s upbeat forecasts for the economy, published at the start of August, have already been pulped. RBA Governor Philip Lowe is widely expected to go into the meeting with an open mind about changing plans around the taper.

The downturn in the economy has also fuelled concern about added stress on the federal budget.

ANZ warned this week that the budget deficit in the year to June 2022 could well be the biggest on record as tax revenues dry up, and extra fiscal stimulus is needed to ensure the economy retains a pulse going in 2022.

The impact of lockdowns will push the forecast budget deficit in the year to June 2022 to between $130bn and $140bn from a projected $106.6bn, ANZ said.

David Plank, ANZ’s head of Australian economics, said the government is expected to use its mid-year review of the budget in December as a launching pad to announce further fiscal stimulus.

The Wall Street Journal