Sydney’s Covid-19 lockdown weighs on Australia’s economy

Australia’s stellar economic recovery is under growing threat as Sydney faces the harsh reality of a worsening Covid-19 outbreak.

Sydney's CBD shows the sign of the times as NSW remains in lockdown. Picture: NCA NewsWire/Jeremy Piper

Australia’s stellar economic recovery is under growing threat as Sydney faces the harsh reality of a worsening Covid-19 outbreak that looks likely to extend a three-week lockdown well into August and potentially beyond.

Daily Covid-19 cases in Sydney, which accounts for 32 per cent of Australia’s national output, have climbed to their highest levels since March 2020, as authorities have struggled to arrest the spread of the highly contagious Delta variant of the virus.

“The lockdown in Greater Sydney will weigh significantly on economic activity for as long as it is in place,” said Paul Bloxham, chief economist at HSBC Australia.

NSW recorded its first death from the virus in 10 months this week, increasing fears around the outbreak, and shattering the calm that had settled on the city after a lengthy period where the virus appeared contained.

Economists are weighing the potential hit to the economy if business activity across Sydney is forced into long-term suspension, lifting unemployment, sapping confidence and keeping borders with other states shut.

A low vaccination rate is also worsening the situation. Only 8.5 per cent of Australians are fully vaccinated, making controls on movement the key tool for containing the virus spread. Australia’s performance compares poorly with full vaccination rates in the US and the UK at 48 per cent and 51 per cent.

NSW Premier Gladys Berejiklian speaks to the media on Monday The NSW government estimated that each week of lockdown takes $850m off national output. Picture: Getty Images

Australia’s economy has roared out of the pandemic-induced recession that marked the first half of 2020, riding on a wave of fiscal and monetary stimulus and surging commodity prices.

The rapid bounce in the economy has seen unemployment rates tumble, tightening the job market. In response to the rebound, the Reserve Bank said last week that it was beginning a slow withdrawal of alternative policy measures, including a tapering of its quantitative easing program from September.

The NSW government estimated that each week of lockdown takes $850m off national output. Mr Bloxham said that if Sydney’s lockdown is as long as the one that crippled Melbourne last year for 16 weeks, the hit to national output would approach 0.7 per cent of GDP.

“If cases cannot be reduced to zero in NSW, this presents a challenge for the whole national strategy for managing the pandemic,” he said.

“State borders would need to remain closed while there is zero tolerance in these other states. The trans-Tasman travel bubble would likely remain closed to NSW while there is also zero tolerance in New Zealand.”

The lockdown is exacerbating wider problems already faced by Sydney, namely the loss of international tourists due to the closure of borders and the disruption to the flow of international students to its universities.

Moody’s Analytics says the latest lockdown could be longer and more damaging. It is shuttering in around 20 per cent of the country’s population, which looks likely to have a big impact on consumption, a major driver of the recovery in the last year.

Adding to the threat is the sluggish vaccination program, keeping it vulnerable to further infection spikes, Moody’s said.

Dow Jones Newswire