The economic cost of new lockdowns is rising fast

Extension of the lockdown in Victoria, the snap closure of South Australia and tougher restrictions on travel between states have all but assured the latest Covid-19 outbreak will have a heavy impact on the national economy. With 13 million citizens now in lockdown, and tougher restrictions imposed on business, earlier assumptions about the speed with which support measures could be withdrawn are being re-examined. The risk is that new support measures already introduced will need to be reconsidered as the clamp on business is extended and the economic pain of the lockdowns takes root. With Melbourne shut for another seven days and Greater Sydney shuttered, possibly for weeks to come, the nation’s economic engine is on a forced idle.

Greater Sydney and Greater Melbourne have not been in lockdown at the same time since the start of the pandemic. Sydney accounts for nearly one-quarter of the nation’s gross domestic product and Melbourne another 20 per cent. NSW Premier Gladys Berejiklian’s restrictions on building activity will exacerbate the economic pain. As a result, the optimistic tone revealed in the minutes of the Reserve Bank’s July 6 meeting, released on Tuesday, was already out of date. Early this month, RBA board members remained upbeat, noting the “economy was transitioning from recovery to expansion” and “the solid momentum in growth had continued into the early part of the June quarter”.

The RBA had foreshadowed an easing of its bond-buying program, which has flooded the economy with liquidity during the pandemic. Bond purchases were due to be scaled back from $5bn a week to $4bn, possibly within months. That is now on hold, with market analysts expecting any tightening to be deferred until early next year. The prospect of higher interest rates also is pushed further into the future. Where some analysts had been calling for the RBA to begin tightening rates sooner than forecast, that is now much less likely. The RBA board says it will continue with low rates until there is full employment and inflation consistent with the 2 to 3 per cent target. The bank’s central scenario for the economy is that this condition will not be met before 2024.

Economists are tipping the twin lockdowns in Sydney and Melbourne are likely to drive GDP down in the September quarter, a sharp reversal from the V-shaped recovery that had exceeded expectations. The longer the lockdown in Greater Sydney and Melbourne continues, the bigger the economic damage will be. The anecdotal evidence is mounting that many small businesses will not survive an extended lockdown. Victorian Chamber of Commerce and Industry chief executive Paul Guerra said businesses and workers did not have the cash or emotional reserves for further restrictions on trade and work. He said governments needed to find a way to compensate for their losses. As Patrick Commins reports on Wednesday, household confidence in Sydney last week recorded its sharpest drop since March last year. Commonwealth Bank data shows spending crashed last week to be 0.6 per cent lower than 2019 levels. Domestic concerns are added to new fears globally about how effective existing vaccines will be against the Delta variant of the Covid-19 virus.

These concerns are feeding into global equity markets, triggering a sell-off on Wall Street on Monday. Doubts about the efficacy of the Pfizer vaccine are the last thing the federal government needs as it attempts to get on top of the vaccine rollout. It must learn the lessons of AstraZeneca and not allow fringe discussions to drain confidence in the vaccine program. The worsening lockdown increases pressure on the Morrison government, which must act to safeguard the national economy from the state lockdowns as it builds confidence in the vaccine rollout.