AMW: Lockdowns to weigh heavily on Q3 but there’s a light with vaccines
The Sydney lockdown is now in its fourth week with restrictions tightened further on the weekend. In this Weekly we update our estimates of the impact of these recent lockdowns.
- The Sydney lockdown is now in its fourth week with restrictions tightened further on the weekend, and Victoria is also set to extend its snap 5‑day lockdown. A more protracted lockdown extending into August for Sydney cannot be ruled out
- In this Weekly we update our estimates of the impact of these recent lockdowns. Our assessment is that a 6-8 week Sydney lockdown and a 2-week Victorian lockdown could potentially subtract $10bn off GDP, equivalent to around 1.9ppts of GDP. This means Q3 GDP is likely to be firmly negative. Recently released COVID-19 disaster payment data is already pointing to an acute impact with 331k applications.
- Last week’s employment data showed most of the adjustment from Victoria’s prior snap two-week lockdown occurred via hours (VIC hours worked -8.4% m/m), rather than by employment (VIC employment -0.3%), as well as by people leaving the labour force (VIC participation rate -0.4% to 66.1%). A prolonged lockdown though risks seeing those who lost hours eventually losing employment.
- The lockdown also might weigh somewhat on emerging wages pressures, meaning the prospect of a rate rise as early as 2022 is even more unlikely. NAB continues to see the RBA waiting until 2024 before lifting rates which we recently re-affirmed (see our NAB Monetary Policy Update for details).
- Should the lockdown extend into August, then the RBA may postpone an anticipated further tapering of QE beyond mid-November. The RBA could also revisit the already announced taper to $4bn a week starting in September (as hinted in two media articles), though we think at this stage it is unlikely given the strong recovery to date.
- Importantly we assess the lockdown impact as again likely only to be temporary, with the lessons from prior lockdowns being that activity rebounds sharply when restrictions are eased. Accordingly, we would expect a reasonable activity bounce back to occur in Q4 and Q1 2022, especially given announced government support.
- The reality though of a prolonged lockdown in Sydney is an acute reminder that Australia’s aggressive suppression strategy means lockdowns remain a risk until vaccine penetration lifts enough for Australia to start to live with the virus.