Citi Flags Sharp Slowdown Risk for Australia as Omicron Rages

(Bloomberg) -- Citigroup Inc. economists warned Australia's growth could slow sharply, driven by record-breaking daily Covid-19 cases amid a shift in the government's strategy to live with the virus.

Economists led by Josh Williamson now see the risk of a major hit to first-quarter growth that could cap the expansion at 1.3%, down from a base-case forecast of 2.3%, as fear surrounding the omicron variant damps activity even in the absence of more government restrictions.

Most analysts see Australia's $1.5 trillion economy returning to growth in the final three months of 2021 after shrinking in the period before that, but the country is now suffering its largest Covid outbreak since the pandemic began. Some 71,144 new cases were discovered Thursday, jumping from a pace of under 2,000 daily infections early last month.

“Although we don't expect the current outbreak to derail the economic recovery in 2022, there is early evidence that mobility has declined in recent weeks as COVID-19 cases spike, despite the fact that governments haven't announced onerous restrictions.” the Citigroup economists wrote.

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A nationwide shortage of rapid coronavirus test kits, coupled with long waits at testing clinics, could also deter people from participating in economic activity for the next month or two, they said.

Still, the economists said they see the Reserve Bank of Australia announcing a further tapering of its weekly bond purchases at next month's meeting, halving its buying pace to A$2 billion ($1.4 billion). They also stuck to the view that the RBA will start to lift its cash rate in early 2023 from a record low of 0.1%.

“The RBA has the advantage of underlying inflation being below the mid-point” of its 2-3% target band and the bank's business surveys point to restrained wage gains, the economists said. “It therefore has more time to assess the situation than other central banks.”