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Lockdowns threaten our economic recovery

·4-min read
Lockdowns threaten the economic recovery. Source: Yahoo Finance/Getty
Lockdowns threaten the economic recovery. Source: Yahoo Finance/Getty

The COVID-19 pandemic has shown how policy decisions, including those relating to health outcomes, can influence economic conditions.

The mistakes of the Berejiklian New South Wales government about the timing of locking down Sydney is certain to lead to an extended period where parts of the economy go into hibernation, with restrictions and interstate border closures coming into play. 

The problem is escalating by the day.

There are now COVID-19 cases as far afield as Queensland, the North Territory and Western Australia and case numbers are doubling every two or three days.

This is not good health news.

This is not good news for the economy.

Over the past six months, the economic news for Australia has been spectacularly positive. The recovery from the 2020 recession has exceeded all expectations and just last week, the sharp improvement in the labour market had forecasters revising their expectations for the unemployment rate to keep falling, perhaps heading to 4.5 per cent within the next 12 months.

Many of the best economic forecasters were so impressed with the pace and extent of the recovery, that they were expecting early interest rate rises from the RBA. This would be good news as rate hikes are usually associated with strong growth, rising wages growth and inflation. Included on that list are the economists from Westpac and the ANZ bank.

The current lockdowns, border closures and undoubted blow to business and consumer sentiment will see economic activity weaken.

It is not clear how long the lockdown will last and how the virus may spread across the country. If it is longer than the current two weeks in Sydney and the outbreak spreads to other regions, spending and investment decisions will be hit hard.

This time it’s different

Unlike in 2020, the loss of momentum in the economy now will not be offset by more economic policy stimulus measures. These worked well this time last year and were vital in driving the recovery.

Interest rates will not be cut, as they were in 2020 and there seems little prospect of the Federal government revamping JobKeeper payments and the additional supplement to the JobSeeker payment.

It is all on the business sector and consumers to ride through the current lockdown.

The current lockdowns will also distort the economic data for several more months.

As was the case over the past year or so, there will be renewed quirks in the retail sales, labour force and other statistics. At the best of times, it can be hard to get accurate insights into the economy. In the past year and in the next few months it will be increasingly difficult.

When looking back on the 2020 recession, it was the widespread lockdowns that triggered it. It was not the result of a policy change or any other factor.

And while the lockdowns now are clearly less extreme and extensive than during the first half of 2020, their impact will see the economic conditions weaken in late June and certainly in to July.

Travel plans have been cancelled. The hospitality sector is being crunched as people are compelled to stay home.

While there may be some lift in spending on home delivery meals and the like, the net effect is negative.

Many casual workers are not being called to work. Their pay has slumped to zero. This income is lost forever and no doubt spending will be weaker as a result.

The COVID-19 breakout from NSW and the gamble of Premier Berejiklian to delay locking down Sydney will be a costly one.

She did so knowing the supply of vaccinations was woefully inadequate with a small proportion of the population already vaccinated.

The risks were huge.

Let’s hope that the spread of the most recent variant is contained soon and the economic fall out is mild.

The fear is that it wont and the good news on the economy could quickly go into reverse.

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