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Dow Jones Newswires: Australia’s economy shrinks in Q3, but rebound is already underway

SYDNEY — Australia’s economy shrank in the July-September quarter as efforts to combat the delta variant of the COVID-19 virus forced more than half the country into strict and lengthy lockdowns.

The economy contracted by 1.9% in the third quarter from the previous quarter and grew 3.9% over the year, the Australian Bureau of Statistics said Wednesday. Economists had expected a 2.5% contraction in the third quarter.

Still, with lockdowns now easing in key states such as New South Wales and Victoria, and the country moving closer to opening its borders to international travelers, the focus of attention has already shifted from the weak third quarter to a fourth-quarter recovery.

“The September quarter national accounts are old news now. While they give us a detailed starting point for the economic recovery, markets are rightly focused on the rebound in the current quarter and the risks to the broader outlook,” said Felicity Emmett, an economist at ANZ.

Economists warned that global unease about the omicron variant of COVID-19 could curb the recovery, but for now attention remains on emerging inflation risks, and the potential for skilled labor shortages to push up wages growth over the next year.

Many economists are already forecasting that the recovery in the fourth quarter–led by a bounce in consumer demand and a build-up in household savings through the pandemic–will more than offset the soft third-quarter result.

Even as Omicron looms as a threat, Australian financial markets continue to price in as many as three interest rate increases in 2022.

“Growth should continue into the new year as international borders reopen and major events return, with the three months to March likely to be another strong quarter before growth begins to normalize over the year,” said Alan Oster, chief economist at National Australia Bank.

Australia’s high COVID-19 vaccination rates should also offer some defense to any resurgence in the pandemic.

“GDP is backward looking and the economic landscape has changed markedly since the September quarter,” said Gareth Aird, head of Australian Economics at the Commonwealth Bank. “Vaccination rates are exceptionally high, lockdowns are over and the economy is once again starting to fire on all cylinders.”

A strong economic recovery in early 2022 will also establish the backdrop to a federal election expected in May, and underpin a likely decision by the conservative coalition government to announce income tax cuts in its budget in March.

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