Australia Third-Quarter GDP to Be Cut 2.5% by Victoria Lockdown

(Bloomberg) -- Australian Prime Minister Scott Morrison warned the lockdown across Victoria state and even tighter measures in Melbourne to contain a Covid-19 outbreak will cut gross domestic product by 2.5% in this quarter.

“The events in Victoria are devastating,” Morrison told reporters in Canberra Thursday as he outlined Treasury's initial estimates of the economic impact. “Devastating for the Victoria economy but also the national economy. The supply chain impact, the confidence impacts, these things are obviously impacting over states and territories.”

The prime minister estimated the unemployment rate was likely to peak closer to 10% -- as forecast by the central bank Tuesday -- rather than the 9.25% seen by Treasury in the economic update two weeks ago. The effective unemployment rate that includes workers reduced to zero hours, is now expected to climb back to nearly 14% from around 11% where it is currently, Morrison said.

The rest of Australia has isolated Victoria, shutting borders as the state's Covid infections soared. Victoria, which accounts for almost a quarter of GDP, has implemented a curfew from 8 p.m. to 5 a.m. for Melbourne's 5 million people and drastically tightened restrictions on retail, manufacturing and construction. The wider concern is that the spillover to the national economy erodes confidence and prompts firms to put off hiring and investing.

What Bloomberg's Economists Say

“The GDP impact of Victorian restrictions is significant, but we estimate it will dampen, rather than derail, Australia's economic expansion in 3Q. While an extension of Australia's recession is a clear risk, the recovery across other regions should see Australia's GDP expand modestly in 3Q. Successful containment, and the easing of Victorian restrictions through September and October, could see the rebounding of Victorian activity boosting growth in 4Q.”

James McIntyre, economist

The Reserve Bank of Australia releases its quarterly update of economic forecasts Friday. in his policy statement Tuesday, Governor Philip Lowe predicted output would fall 6% over 2020, but then grow by 5% in 2021.

“In this scenario, the unemployment rate rises to around 10% later in 2020 due to further job losses in Victoria and more people elsewhere in Australia looking for jobs,” Lowe said. “Over the following couple of years, the unemployment rate is expected to decline gradually to around 7%.”

Morrison said Treasury's estimates would be updated in the October budget.

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