Delta economic hit $5bn bigger than expected

Josh Frydenberg has revealed Treasury expects the Delta blow to the economy in the September quarter will be about $5bn bigger than previously thought.

Treasurer Josh Frydenberg has revealed a more pessimistic view on Delta’s hit to growth in the September quarter. Picture: Martin Ollman

Josh Frydenberg has revealed that Treasury expects the Delta blow to the economy over the three months to September will be about $5bn larger than previously thought, flagging a quarterly contraction of “potentially 3 per cent or more”.

That compared to previous guidance that real GDP would drop by “at least 2 per cent” as lockdowns devastated economic activity and forced more than half of the population to stay at home and authorities raced to push vaccination rates towards 70-80 per cent.

The Treasurer also told attendees at the Citi Australia Investment Conference that he was “very much open” to a review of the RBA – as recently recommended by the OECD – saying “it has been a number of years since they’ve had a review into their ­operations”.

“There is a case there for having a review and that is something we would certainly be open to, (and we) continue to talk to the Treasury and RBA about a timetable for it,” he said.

ANU professor Warwick McKibbin – who served for a decade on the central bank board – said the OECD would not have recommended a review into the central bank without the explicit go-ahead from Treasury, suggesting there was already official support for such a move.

He said he was in favour of more monetary policy experts being added to the RBA’s board. “The board needs to challenge the bank staff much more, there needs to be different views presented,” he said. “The board has done a great job, but it needs a better form of governance.”

Even as Mr Frydenberg unveiled the more official pessimistic assessment of the damage to the national economy, he said he remained “confident” Australia would bounce back from recent lockdowns as Victoria and the ACT follow NSW out of lockdown in coming days and weeks.

“Overall, I’m confident the economy will bounce back strongly, as it has done through this pandemic,” Mr Frydenberg said.

“Once restrictions are eased, people will get back to work very quickly.”

Payrolls figures suggest about half a million Australians were stood down as a result of lockdowns, although the hit to employment has largely been underplayed in official labour force statistics, which showed unemployment dropped to 4.5 per cent in August as the pool of available workers shrunk dramatically.

Economists expect labour data on Thursday will show unemployment lifted to 4.8 per cent in ­September.

NAB chief economist Alan Oster said Treasury had likely downgraded its forecast for the Delta-disrupted September quarter as new information had come to hand. “As you get more data in, you get more worried,” he said.

Issuing its updated outlook, NAB reiterated that output likely contracted by 3.5 per cent over the three months to September, to be followed by a 2 per cent rebound leading up to the end of the year.

Mr Oster said the bank’s internal data pointed to a 20 per cent slump in consumption versus the June quarter – roughly half the drop in quarterly consumption experienced at the height of the nat­ional lockdown of last year, when real GDP collapsed by 7 per cent.

Mr Oster said Treasury’s more pessimistic assessment of the Delta blow was “significant” but “practically, it doesn’t mean anything – it’s already happened”.

Instead, policymakers and economists are looking ahead.

The immediate fruits of reopening were apparent on Monday as NSW residents enjoyed a first day out of lockdown by hitting the shops and getting their hair and nails done. ANZ card data revealed a 20 per cent jump in spending in NSW on Monday versus a week earlier, with beauty services up 870 per cent and clothing expenditure up 168 per cent.

Nail salons were in demand, with spending up 2300 per cent versus lockdown and pre-lockdown levels, ANZ figures showed.