The impact on spending is greater than the hit to income caused by the growing number of lockdowns, according to Commonwealth Bank’s head of Australian economics Gareth Aird.
In a research note the economist said lockdowns have a large and immediate negative impact on consumer spending, and by extension Australia’s GDP.
And while those having a reduction in work hours and loss of profit for businesses is bad, the negative impact is cushioned by government compensation, Aird said.
“The old adage that ‘one person’s spending is another person’s income’ rings true in normal times,” Aird said.
“Indeed the standard relationship between spending and income and by extension consumption and production is at the heart of a capitalist economy. But in many respects capitalism is temporarily suspended during lockdowns.”
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Effect of snap lockdowns
Aird said the return of temporary snap lockdowns is unfortunate in terms of the impact they have on the Australian economy.
“Lockdowns have a very large and immediate negative impact on spending. Indeed that is the natural consequence of placing restrictions on households and businesses to limit the spread of COVID‑19,” he said.
“But the impact on income is not as big due to ‘compensation’ payments from the public to the private sector.”
Aird pointed to the effect of the lockdowns seen last year, in which he noted that payments to households and businesses during the national lockdown that “a counter intuitive situation unfolded”.
“More specifically, household income and company profits went up as spending collapsed. Huge payments from government to households and businesses held the economic machine together as private demand collapsed,” Aird said.
“A similar dynamic is underway because of the latest lockdowns, albeit the compensation payments to households are not as large.”
Essentially, Aird said the drop in spending means a drop in GDP which directly impacts Australia’s economic recovery.
A boom ahead?
However, it’s not all bad news with Aird predicting that spending will experience a sort of boom once lockdown restrictions are lifted because of the extra savings Aussies will have.
“Household savings spike during lockdowns which supports a swift rebound in spending when restrictions are eased,” he said.
“If the current lockdowns across the country end as scheduled then the damage on the macro economy will be minimal and the economic outlook will remain strong.”
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