All lockdowns are not created equal

Sydney’s lockdown will be deeper and longer than first expected. Increasingly tight restrictions, in place since late June, have undoubtedly limited the spread of COVID-19 but the number of daily cases continues to rise and has eclipsed the peak of the pandemic in March last year.

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The more contagious Delta variant is a clear game changer. It is proving more difficult to contain, suggesting restrictions will remain for some months.

"The combination of the longer shutdown in Sydney and restrictions in other states suggests gross domestic product will take a bigger hit than initially anticipated.”

Since ANZ Research’s previous estimate on the likely economic impact, cases have spread to other cities with shorter lockdowns reinstated in Victoria, South Australia and Queensland while case numbers in Sydney have continued to rise. This spread highlights the difficulty of containing the more transmissible Delta variant and raises the issue of the very high risk of further contagion from Sydney into other cities and regions.

The combination of the longer shutdown in Sydney and restrictions in other states suggests gross domestic product (GDP) will take a bigger hit than initially anticipated. ANZ Research now expects GDP to fall 1.3 per cent in the third quarter compared with the previous estimate of +0.4 per cent and a pre-Sydney lockdown estimate of +1.1 per cent.

This decline is based on the assumption most restrictions in Sydney will continue until the end of September with a gradual easing through October.

Some construction activity has resumed though with some restrictions on workplace numbers and mobility. Household spending will take the biggest hit from the shutdown. Consumer confidence has fallen sharply, not only in Sydney but around the country.

ANZ card data show restrictions have weighed heavily with spending for the week to 24 July 2021 the lowest since late April 2020 before JobKeeper and the JobSeeker supplement were first paid out.

As we expected, further fiscal support was announced last week with the Disaster Payment increased, an additional $200 a week for those receiving welfare benefits such as JobSeeker and an extension of business support, which links payments and headcount. These additional measures will help to ensure a strong bounce back once restrictions ease. ANZ Research assumes much of the lost activity in the third quarter will be recouped in the fourth quarter with a 2.2 per cent bounce in GDP.

Recent experience has shown consumer confidence quickly recovers from snap lockdowns but what about extended lockdowns?

Consumer confidence has declined sharply in recent weeks but it is still higher than the lows reached in Victoria’s long lockdown and it is well above the depths seen at the beginning of the pandemic. ANZ Research thinks this reflects less uncertainty about the health and economic impacts.

Victoria’s long second lockdown began on 20 June 2020 and consumer confidence reached its lowest on 16 August 2020, before it started to recover. Melbourne was the worst hit, recording a fall in confidence of 15 per cent. But Sydney didn’t fare much better, with confidence down 14.6 per cent. The overall national loss of confidence was -11.3 per cent and confidence only started to recover as case numbers began to fall.

The lockdown in Greater Sydney began on 25 June and has been extended to at least the end of August. The loss in confidence from the start of the lockdown currently stands at -16.1 per cent for Sydney, -9.5 per cent for Melbourne and -10.4 per cent nationally.

Although the extent to which confidence has fallen is similar, the level of national confidence after five weeks of the Sydney lockdown is much higher than the lowest value reached during the Victoria lockdown.

ANZ Research thinks the key reason for this difference is the Victorian lockdown was imposed at a time when the economy had just started recovering after the huge shock of the country-wide lockdown.

In contrast the Sydney lockdown was imposed after the Australian economy had practically recovered on all fronts – and was even better on some, such as employment.

For the year to December, ANZ Research now expects GDP to rise 3.8 per cent compared with 5.0 per cent before the onset of the Sydney lockdown. ANZ Research has lifted the growth estimate for next year, however, as the economy recovers some of the lost output, with growth in the year to December 2022 now expected to be 4.5 per cent compared with 3.5 per cent previously.

Two key factors will mitigate the effects on the NSW and national labour markets. First, the fiscal support discussed above, including for JobSaver, which requires businesses to maintain their headcount. Second, labour hoarding is a common approach by businesses to avoid the costs and delays of rehiring once restrictions ease, particularly given reported difficulty finding labour and the record high job vacancy rate.

Felicity Emmett is Senior Economist and David Plank is Head of Australian Economics at ANZ

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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