Victoria’s Spiraling Crisis Likely to Prolong Australia’s Recession

(Bloomberg) -- Victoria’s spiraling Covid-19 outbreak and the closure of large tracts of the southeastern state’s economy is likely to prolong Australia’s first recession in almost three decades.

A curfew in Melbourne, the shuttering of swathes of the retail and manufacturing sectors and tight limits on construction for six weeks are set to result in another quarterly contraction in gross domestic product, said Terry Rawnsley at consultancy SGS Economics & Planning.

The economy contracted 0.3% in the first quarter, likely declined about 7% in the second and probably 4-5% in the third, said Rawnsley, one of the foremost economists on Australia’s regions. “This has sort of confirmed that we’re going to have three consecutive quarters of decline in GDP,” he said. “It’s a pretty grim run of economic news.”

The outbreak in Victoria, which accounts for almost a quarter of Australia’s GDP, threatens to overwhelm a recovery in other parts of Australia. The effective isolation of the state and sporadic outbreaks in neighboring New South Wales are likely to start eroding confidence in the rest of Australia, which had been in the vanguard of nations enjoying early success in flattening the curve of new infections.

Melbourne’s outbreak has shown no signs of abating, three weeks after the city’s 5 million residents were ordered to stay at home except for essential work, exercise, medical care or provisions. The Victoria government has now imposed an 8 p.m. to 5 a.m. curfew, widened the lockdown across the entire state and on Monday announced the most stringent workplace restrictions since the crisis began.

The state said Tuesday that anyone flouting isolation rules will face an on-the-spot fine of as much as A$5,000 ($3,560). It recorded 439 new cases of the virus in the past 24 hours and 11 deaths.

Capital Economics Ltd. reckons Victoria’s new measures will cut Australia’s third-quarter GDP by about 1.5%, or double the Treasury’s 0.75 percentage point reduction forecast in the economic and fiscal update released just under two weeks ago.

“Output could fall even further if the surge in cases in Victoria isn’t brought under control by the end of the third quarter or if other states experience a similar spike in cases and need to reimpose restrictions on activity,” said Marcel Thieliant, senior economist for Australia at Capital Economics. On his current estimates, the national economy will expand “a measly 0.5%” in the third quarter.

Construction firms must radically reduce worker numbers on sites, while production at meatworks statewide will be cut by a third. Premier Daniel Andrews on Monday said essential services such as banks, supermarkets, pharmacies and petrol stations will remain open. The new restrictions would see an additional 250,000 workers forced to stay home, he said.

Credit Suisse Group AG analysts said in a note that underestimated the impact, given that around 600,000 people are employed in highly affected sectors. So far the market has not reflected the severity of the restrictions in Victoria, they wrote, noting that retail, wholesale, services and construction sectors will be hit hard.

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Australia’s Treasury Secretary Steven Kennedy told a parliamentary panel last week that the economy likely contracted by 7% in the second quarter.

With Melbourne’s reputation as a weekend getaway for domestic tourists damaged, the economic effects are likely to outlast the outbreak itself, according to Rawnsley.

“You come to major events, you go to laneways, drink cocktails, et cetera -- that’s taken a big hit,” he said. “It’s probably going to be three or four years before the Victorian economy starts to really get back to where it was before.”

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