Australian economy likely in slowdown before Delta effect

30 Aug 2021

Australia’s economy was already likely in a slowdown before the impact of the Delta variant led to large-scale restrictions, leading to the shutdown of businesses and jobs.

The economy may already be in recession if GDP data out on Wednesday matches the weakest market forecast. The average prediction is for 0.5% growth in Q2, yet forecasts range from a 0.1% decline to 1.2% growth, underscoring the high degree of uncertainty. This would be another step down from 1.8% in Q1 and 3.2% in Q4 2020.

“For most of the June quarter the Australian economy was travelling well, but then the Delta variant arrived,” CBA’s head of Australian economics Gareth Aird said.

“For all intents and purposes, the Australian economy is currently in a manufactured recession as we go through another huge negative shock.”

Although consumer spending and business investment were likely strong in the quarter, it was predominantly down to a rise in imports and running down inventories as opposed to an increase in output, Reuters reports.

Moreover, annual growth is forecast to hit a record 9.2%, as the first round of coronavirus-fuelled lockdowns last year led to a 7.0% contraction. The economy will likely shrink again with the fresh lockdowns in Sydney, Melbourne and Canberra.

“While a flat to negative Q2 GDP print is a real risk, this is far in the rear vision mirror as far as the economy is concerned given the sharp contraction expected in Q3 which we have pencilled in at around -3% q/q,” according to NAB chief economist Alan Oster.

In terms of how long the lockdowns will last, Victoria state indicated restrictions will be prolonged past this week, whilst New South Wales is planning to keep the curbs in place throughout September and possibly into October.

This is longer than first anticipated by the Reserve Bank of Australia, which had predicted the economy would contract by only 1% this quarter.