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Will lockdowns cause a recession?

Staff writer
02 September 2021 2 minute readShare
lockdowns cause a recession

Australia could avoid entering a double-dip recession even with growing COVID-19 cases leading to prolonged lockdowns, with most of the economic damage already being done, an economist has revealed.

According to BetaShare’s chief economist, David Bassanese, there’s a strong possibility that Australia will in fact avoid a recession.

With a recession defined as two negative quarters of GDP in a row, Australian Treasurer Josh Frydenberg pointed out that the fourth quarter will be critical to Australia’s economic future.

“My expectation is that the September quarter will be negative,” Mr Frydenberg said.

“But with respect to the December quarter, that does depend to a large extent on how successful New South Wales, our largest state economy, is in getting on top of this virus.”

While the government sees the need for jabs in arms for life to return to normal, Mr Bassanese believes Australia can in fact avoid a recession even if lockdowns remain.

“So, even in a worst-case scenario where current lockdowns are extended beyond September, we might still narrowly avoid a technical recession, if only because most of the decline in activity would have already taken place,” he noted.

Under his assumptions, the June quarter will be positive, off the back of strong wages, retail sales and construction only dipping slightly.

“The good news is that, so far at least, negative June quarter growth next week seems unlikely,” the economist said.

“Although there are still a few building blocks to come early next week, such as inventories and net exports, the indicators so far available suggest a positive growth outcome.”

However, NAB disagrees with a statement earlier this month pointing to the real possibility that Australia is already in recession.

NAB initially pencilled in a 0.4 of a percentage point lift in GDP over the three months to 30 June, which included a small detraction of 0.2 of a percentage point due to Australia’s balance of trade.

But that detraction could in fact be between 1.0 and 1.9 percentage points, NAB director of economics and markets Tapas Strickland said, “which, if not made up elsewhere, could see Q2 GDP flat or even potentially negative”.

“NAB is currently characterising it as a risk given we haven’t seen many other GDP partials to date. With Q3 already likely to be deeply negative, it does raise the potential for the ‘R’ word even before we get to Q4.”

However, Mr Bassanese disagrees, stating that only the September quarter will be negative. His predictions were correct, with the latest figures showing GDP growth of 0.7% over the three months to 30 June. 

“While the recent extensions of the NSW and Victorian lockdowns add to the risk of a negative Q4 outcome, the brunt of the lockdown-related step down in GDP took will be concentrated in the current September quarter, suggesting the level of GDP need not necessarily decline further in Q4,” he said.

However, Mr Bassanese conceded the need for a high vaccination rate remains, with Australia unlikely to reopen before the country hits its 70% to 80% vaccine targets.

“Assuming the vaccine rollout proceeds apace, moreover, there is a good chance for some bounce-back in activity from late September/early October — as those fully vaccinated at least are granted greater freedoms,” he concluded.

Will lockdowns cause a recession?
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