Another outbreak hits growth, housing set to slow

HSBC economist Paul Bloxham reckons has downgraded his economic growth forecasts given the outbreak of the Delta-variant, the only slowly re-opening border, and tensions with China. 

The Greater Sydney lockdown will see GDP contract by 0.3 percent in the third quarter and rise by only 0.3 percent in December before bouncing back in 2022. 

“The latest guidance from the authorities suggest it will be 'at least' five weeks in total, but the risk is that it is longer,” he said. 

"As a point of comparison, the lockdown in Victoria in the 2020 second half which was more stringent and dealing with a less transmissible strain of the virus, was in place for 16 weeks, to drive the case numbers back to zero. 

Bloxham cited NSW Treasury estimates that every week of lockdown reduces GDP by $850 million. 

On these estimates, the six-week lockdown would knock 0.25 percent off annual GDP (1.0 percent quarterly), while a 16-week lockdown would knock 0.7 percent off annual GDP. 

“There is some risk that the lockdown will not get the case numbers back to zero, given the rapid transmission of the Delta variant. In this case, Sydney could be in some form of lockdown until vaccination rates are near herd immunity levels, which is unlikely until March 2022, at the earliest.” 

“Other states have mostly closed their borders to Greater Sydney, and there has been some early spread of the outbreak to Victoria, which has seen that state announce a 5-day lockdown from 16 July. There are a small number of cases in Queensland, but the remaining states and territories have no community transmissions at this stage.” 

Less support than before 

Although policymakers have delivered fiscal support measures for affected households and businesses, the economist said these were on a smaller scale than the large earlier covid fiscal programs. 

“Even before the Sydney outbreak, we had expected Australia's growth to slow from its recent rapid growth rates, as population growth has stalled due to the closed border and as the fiscal impulse fades.” 

The HSBC economist expects housing price growth to slow because of some higher fixed rates and stalled population growth due to closed borders. "This will dampen demand just when supply has been boosted by pandemic-related government subsidies for building."  

Based on his estimates, this combination is set to drive some housing oversupply until population growth can catch up. :We see borders largely closed until mid-2022, and only gradually re-opening after that. Net migration is not expected to return to its pre-pandemic rate until late 2023.” 

Also, as investor interest in housing increases, prudential tools may need to be applied to contain a build-up of risk in housing debt, he said. 

Bloxham predicts housing price growth to drop from 11-13 percent in 2021 to 5-9 percent next year. 

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