Economic double punch Sydneys lockdown will have lasting legacy

Sydney is not accustomed to recessions.

Prior the coronavirus pandemic it had not had a prolonged economic contraction for almost 40 years. A recent analysis of the city’s long-term economic performance by the consultancy SGS Economics and Planning found Sydney even managed to keep growing through the deep national recession of 1990-91. The city’s last really big downturn was in 1982-83.

But the coronavirus outbreak last year brought the long expansion to a halt. And now the long winter lockdown of 2021 will make it a nasty double punch.

A lone person walks across Moore Street, Liverpool as Sydney bunkers down under tightened restrictions. Credit:Sam Mooy

On Wednesday the Commonwealth Bank said it expects employment in NSW to plunge by 300,000 due to the lockdown, with most of the losses in Greater Sydney. A day later Westpac forecast the NSW economy to contract by an eye-watering 7.8 per cent in the September quarter.

NSW Treasury estimates the reduction of economic activity due to the lockdown is costing up to $1.3 billion per week.

Because Sydney accounts for nearly a quarter of Australia’s economic output the disruptions cause by its lockdown will drag on the whole economy.

Federal Treasurer Josh Frydenberg has acknowledged the possibility of a repeat of last year’s national recession â€" defined as two consecutive quarters of contraction in gross domestic product - if restrictions in Sydney fail to contain the coronavirus outbreak.

“I won’t be surprised if the September quarter goes negative,” he said on Thursday. “How we go in the December quarter, which would need to be negative again if we were to go into another recession, will largely depend on how successful NSW is in getting on top of this virus.”

Governments have resorted to the 2020 pandemic playbook in response Sydney’s lockdown and shorter ones this month in Victoria and South Australia.

A big-spending federal-state emergency package was announced on July 13 to assist affected businesses and workers. Only a fortnight later, when Premier Gladys Berejiklian revealed Sydney’s lockdown would be extended until at least August 28, the emergency payments were jacked up again.

The NSW Government alone has now committed close to $5 billion in economic support measures since the current COVID-19 outbreak.

Sydney’s economy appeared to weather the early weeks of lockdown fairly well. But as new restrictions were imposed, especially those on non-essential retail and construction, the economic damage grew.

Analysis of debit and credit card use by ANZ showed spending across Greater Sydney last week was almost 30 per cent lower than before the lockdown and at its worst level since the COVID-19 pandemic began last year.

Separate tracking of household card use by the Commonwealth Bank told a similar story - general retail spending in NSW last week was more than 30 per cent lower than the corresponding period in 2019.

Measures of consumer confidence have also fallen steadily in Sydney amid the uncertainly created stubbornly high daily COVID cases despite weeks of restrictions.

“Vaccines can get us out of this but it is not going to be fast and it is not going to be fun.”

Economist Chris Richardson

Economist Chris Richardson from Deloitte Access Economics estimates an average of 25,000 jobs a week are being lost during Sydney’s lockdown. Of those, about 5000 to 10,000 probably won’t be immediately rehired and will end up on the unemployment queue.

“Unemployment in NSW will likely continue to rise for the bulk of the period between now and Christmas,” says Richardson. “Vaccines can get us out of this but it is not going to be fast and it is not going to be fun.”

State Treasurer Dominic Perrottet insists the emergency payments put in place to support Sydney’s firms and workers through the crisis will ensure a strong recovery.

“The economy rebounded strongly following the first shockwave of COVID-19 in 2020,” he told the Herald.

“This showed the measures put in place by both state and the Commonwealth government worked, but also that people remained confident about the future. Our aim during this current Delta outbreak is to continue to keep people safe from the virus and at the same time protect jobs and businesses so the economy can once again bounce back quickly on the other side.”

It seems those investing in shares and buying properties are confident Sydney will soon bounce back.

NSW Treasurer Dominic Perrottet says Perrottet says we can’t simply expect things to go back to the way they were in February 2020 before the pandemic.Credit:Kate Geraghty

As the city’s COVID crisis deepened this week the local share market set new records and property prices reached fresh highs. Sydney’s media house price shot to a record $1.41 million in the June quarter according to the Domain House Price Report, released on Thursday. Domain’s figures show Sydney’s median house price rose 24 per cent during the past year, or $272,887.

Economist Andrew Charlton said investors seem to be assuming the flood of government support will prevent a sustained downturn.

“If anything I think businesses will look through this even more than last time because they have more certainty it is going to be temporary,” he said.

Charlton also believes many firms will be reluctant to lay off workers because of the skill shortages which became apparent earlier this year.

Most forecasters are expecting the sharp economic contraction during the three months to September to be followed by a return to growth later this year.

But AMP Capital chief economist, Shane Oliver, says the confidence of consumers, businesses and investors will be tested further as the lockdown drags on.

“The coronavirus pandemic has this unending ability to keep surprising us,” he says.

“You just can’t relax.”

Sydney’s winter lockdown underscores some of the changes to economic behaviour likely to be a legacy of the pandemic including additional remote work, more flexible patterns of employment and increased use of digital technologies.

These trends will in turn affect traditional job hubs like the central business district and help reshape urban development including transport systems.

Sydney University transport economist Professor David Hensher, who researches remote work trends, says Sydney’s lockdown will remind employees about remote work.

“For many people it worked out well and more importantly employers were very supportive of remote work, and they remain very supportive,” he says.

Perrottet also says we can’t expect things to go back to the way they were in February 2020.

“COVID-19 has forced all of us to change many things and if there is a silver lining, it is the opportunity this will provide to increase productivity and focus on reform that will help the economy recover,” he says.

A recent report by economist Marcia Keegan of SGS Economics and Planning found Sydney’s knowledge-based industries, well suited to remote work, weathered last year’s pandemic disruptions relatively well. That includes two of the city’s biggest sectors - financial services and professional services - which together account for more than 25 per cent of the city’s economic output.

“A new rhythm has emerged in those industries where working from home is fairly easy,” says Keegan.

But it was a different story for sectors unsuited to remote work including transport, retail, construction, manufacturing, arts and recreation and accommodation and food services. Activity in each one of those was badly disrupted last year.

That uneven performance across industry sectors will likely be repeated during the current lockdown.

“We saw last year that industries such as accommodation, hospitality, travel, tourism and service industries were particularly hard hit and had only partially recovered,” says Perrottet.

“Finding ways to continue to aid and boost their recovery will be important.”

Some regions of Sydney have also been hit much harder than others.

The economic consequences of the lockdown are likely to be disproportionately severe in south-west Sydney where the lockdown has been most stringent due to the level of local COVID infections. Restrictions in that region of the city were tightened further on Thursday after NSW recorded its highest ever number of COVID-19 cases since the pandemic began. The government also announced 300 Defence Force personnel would be deployed to assist police enforce lockdown restrictions across the metropolitan area.

ACOSS CEO Dr Cassandra Goldie warned that economic inequality in Greater Sydney was worsening.Credit:Alex Ellinghausen

Many suburbs subject to the strictest lockdowns have relatively low incomes compared to the rest of Sydney, and a high share of people reliant on social security payments. Fairfield council area â€" a hotspot during this outbreak - had the lowest median household income among Sydney’s local councils at the last census.

Australian Council of Social Service (ACOSS) chief executive Cassandra Goldie says communities in south-west Sydney experiencing the harshest lockdowns need far more support.

“The impact of this pandemic doesn’t affect all people equally and clearly those who are most at risk and who face the greatest barriers to support are typically from low-income backgrounds,” she says.

Dr Goldie warned that “as we speak” economic inequality in Greater Sydney was worsening.

“It has already been exacerbated while everyone has been trying to stay safe and deal with the virus,” she says.

“We are seeing a dramatic increase in income and wealth inequality and unless we have policies to directly arrest that acceleration of inequality we will see the impacts of this for a very long time.”

Matt Wade is a senior economics writer at The Sydney Morning Herald.

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