Will Sydney’s Extended Lockdowns Plunge Australia into a Recession?

Economists predict that Sydney’s lockdowns, if extended again, could bring Australia’s second recession since the pandemic started. 

When it comes to Australia’s economy, Sydney is a powerhouse that provides nearly a third of Australia’s GDP. 

That’s why these latest lockdowns could cause a massive dent in Australia’s economic output, and potentially trigger the second recession in the country since the COVID-19 pandemic began. 

Prior to COVID-19, Australia had developed a reputation for avoiding recessions, which is defined as two consecutive quarters of economic decline. 

Australia had managed to avoid a recession for 30 years until the pandemic arrived, directly following the bushfires that swept the nation, causing the country to go into its first recession in decades.  

Now, it looks like we could face our second recession in two years. 

Experts predict a negative September quarter 

Last Wednesday, Sydney’s lockdowns were extended until August 28th, four weeks beyond their original expiration date. Since then, NSW has recorded some of its highest cases of COVID-19, prompting many to speculate that the lockdowns will likely be extended.  

According to Prime Minister Scott Morrison, The lockdowns will cost the economy of Greater Sydney $750 million per week, with some estimates suggesting that as many as 300,000 jobs could be lost.

Most experts agree that this reduction in economic activity will cause a contraction in Australia’s economy over the September quarter, with the Federal Treasurer Josh Frydenberg stating that it “won’t be surprising if the September quarter is negative.”

Frydenberg’s sentiments are echoed by the head of Australian economics at CBA, Gareth Aird, who stated that:

“By definition, if you’re telling households and businesses to stay at home and stop doing things then you’ll get less production.”

Aird has predicted a contraction of 0.7% in Australia’s GDP over the September quarter, which is a more conservative estimate than Westpac’s prediction of a 2.2% contraction in Australia’s GDP over the same period. 

In Westpac’s release, the bank states:

“Our forecasts are now based on the assumption that the full lockdown lasts until the end of September and that the construction sector operates at only 60% capacity from August 1 until the end of the lockdown.”

The end of lockdowns rests upon vaccination rates 

On Monday, NSW recorded 207 new local COVID-19 cases and the state’s 15th death from the Delta outbreak which started in June. 

Additionally, Queensland detected 13 new locally acquired COVID-19 cases in 24 hours – the biggest one-day rise the state had recorded in a year – prompting Brisbane to extend it’s lockdowns (that were due to end on Tuesday) until Sunday. 

The NSW Premier Gladys Berejiklian has stated that lockdowns will be eased in Sydney in accordance with the vaccination rates of NSW, stating that:

“It is incremental, once you get milestones of 50%, 60%, 70%, it triggers more freedoms.”

Gladys has previously set a target of having 80% of the NSW population vaccinated before lockdowns can be fully eased.

The Premier went on to say that “As we’ve seen countrywide, whether prolonged lockdowns or short and sharp … you can’t live with Delta until the vast majority of our population is vaccinated and I can’t say that more strongly and clearly.” 

“The challenge for us is getting as many people vaccinated in August as possible so by the time 28 August comes around, we have options as to how we can ease restrictions. I want to make that very clear.”

However, New South Wales’ Health Minister Brad Hazzard has stated that it will take roughly four months until New South Wales reaches a 70% vaccination rate, which suggests that Sydney’s restrictions could well remain in place until the end of the year. 

Will Australia go into another recession? 

All signs point to Australia going through at least one quarter of economic contraction, though in order to be classified as a technical recession, two consecutive quarters of economic decline must occur. 

The likelihood of two consecutive negative quarters largely rests upon whether or not Sydney’s lockdowns are continued, and which states or capital cities end up accompanying it. This is what Treasurer Josh Frydenberg has highlighted: 

“How we go in the December quarter, which would need to be negative again if we were to go into another recession, will largely depend on how successful NSW is in getting on top of this virus.”

Should Sydney’s lockdowns be continued, which looks highly likely at this stage, it will lead to a continuation of the already enormous fiscal hemorrhaging that the current lockdowns are causing, due to the reduced economic activity and the stimulus and relief payments being sent out. 

Already, more workers in Greater Sydney are claiming the COVID-19 disaster payments available during the lockdowns than the number that claimed JobKeeper at the peak of lockdowns in 2020. 

Construction, for example, is the fourth-largest employer in the country, and although the temporary ban has been partially lifted upon the industry, many construction industry employee’s describe the remaining restrictions upon construction to be “crippling.” 

Should the shutdown on construction be resumed amid rising case numbers, this alone could cost Sydney upwards of $800 million per week.

And all of this ignores the very real possibility of other states going into lockdown, which would enhance the likelihood of Australia going into its second recession in two years.