Lockdown Impacts On Growth And Equities

Australia | Jul 16 2021

This story features NATIONAL AUSTRALIA BANK LIMITED. For more info SHARE ANALYSIS: NAB

While Sydney endures an extended lockdown, economists are invoking recent history to ascertain the potential fallout for both the economy and sectors within the share market.

-Will Sydney’s current lockdown impact as Melbourne’s did in 2020?
-Downside risks for the consumer sector
-Will provision releases still proceed as planned for the banking sector?
-The major bank most affected by the Sydney lockdown

By Mark Woodruff

Economists at leading brokerages have examined past lockdown data in an attempt to draw conclusions regarding the impact of current lockdowns on economic growth, and upon ASX sectors and stocks.

This has raised a few interesting questions: Will extended lockdowns have the same impact as those during 2020? What is the difference in impact between a whole nation in extended lockdown and individual states?

As Oscar Wilde noted, sometimes comparisons are odious. The uncertain length of Sydney's lockdown, the less severe restrictions and the different levels of fiscal support certainly make comparisons more difficult to draw though potential impacts may still be gleaned.  

Before looking at potential impacts upon different sectors, let’s first examine how the wider economy may be affected by the Sydney lockdown.

Impact on the macroeconomic scene

The current lockdown shouldn’t impact upon Jarden’s forecast of an initial interest rate hike in mid-2023.  

However, it could potentially delay the tapering of quantitative easing, given the likely impact on the labour market of extended restrictions. Jarden's economists had expected tapering to commence in November.

Melbourne's extended 2020 lockdown, lasting almost four months, saw a -15% peak to trough fall in retail sales, costing around -$4bn, and led to a -2.5% or -85,000 fall in employment. If Sydney were to experience similar moves, Jarden estimates a potential  -$11bn or -2% hit to quarterly GDP, a loss of -$5bn in retail sales and potentially -100,000 job losses or -0.8% of total employment.

Without JobKeeper the broker sees potentially greater downside risk for employment though this may be partially mitigated by greater staff retention, due to labour market tightness and the difficulty for many businesses in finding staff.

Melbourne's experience also suggests that once lockdowns end, economic activity rebounds rapidly. Thus a near-term hit should be partially offset by a subsequent rebound.

Wilsons thinks the Sydney lockdown is likely to be measured in weeks, not months. Based on this, Australian growth prospects still look good for the coming year. Australia’s vaccine rollout has disappointed, but is steadily progressing and should pick up significantly in the final quarter of 2021 as vaccine supplies accelerate.

National Australia Bank's business survey results for June showed a drop from the extreme highs of May, with confidence down -9 points and conditions down -12 points, with the latter now back in line with the average for this year.

The survey was taken from June 18-30, and does not incorporate the most recent information on the likelihood of an extended lockdown in Sydney. JP Morgan highlights that previously the link between business confidence/conditions and mobility has been relatively strong, and thus expects a further decline in next month’s survey, as stay-at-home orders persist.

While the link to economic activity from these numbers may be tenuous, the broker had been expecting growth to step down several gears from the second quarter onward, now that the pre-covid level has been recovered, and the survey’s results are at least qualitatively consistent.

Meanwhile, as a preliminary estimate for Sydney, the broker ascribes roughly a third of the hit incurred in the 2020 Melbourne lockdown, weighted by the affected areas’ share of GDP. While a meaningful change, it feels small relative to the variation in the last year and the broker expects the drag in July will be gradually won back in August, and to a larger extent in September.

What sectors are impacted?

Jarden sees downside risk to the Consumer sector (particularly Discretionary Retail), mixed effects for REITs (negative for retail and office, marginally positive for industrial) and a near-term negative for the Bank sector (delaying the unwinding of bad and doubtful debt provisions and capital management).

Hospitality, arts and recreation, retail and other services are industries most impacted by lockdowns. These sectors represent around 21% of employment in Greater Sydney, or 4% of national employment.

As an indication, Victorian retail sales for clothing fell -55%, department stores -46%  and cafes, restaurants and takeaway fell by -38.5%. Meanwhile, food/supermarket spending was broadly flat. 

It’s believed the Sydney lockdown will see similar negative impacts across discretionary retail, and online traffic is not expected to be sufficient to offset the collapse in footfall.

The Jarden retail analysts remain cautious on the outlook for household goods retailers, given significant pulled forward demand over 2020 and increasing competitive pressures.

Will lockdowns have the same effect second time around?

Data show JP Morgan that activity restrictions are having less effect on mobility and the economy overall recently, compared to last year.

Sectors that are the most affected by the pandemic are still below normal. This is because the border constraint was never relieved. Additionally, some of the earlier behavioural/mobility changes (eg work from home) haven’t as yet normalised during the reopening.

Underperforming sectors simply can’t suffer as much from incremental restrictions as they did last year. This applies to tourism and consumer services in the CBD, for example.

It’s all in the relativities

Last year Melbourne was in localised lock-down for an extended period through the third and fourth quarters. The difference with Sydney’s lockdown is that the rest of the country is relatively unrestricted and is no longer in its initial rebound phase from the nationwide shuttering.

The explosive surge last year, as most of the economy reopened, could easily carry a localised shutdown, even in a large city. However, the recovery is now more mature, and against a baseline of moderate growth, the drag from Sydney will be somewhat more obvious.

Effect upon the banking sector

Overall for the banking sector, JP Morgan suggests provision releases are still more likely than not over the next six months, despite the lockdown. The broker thinks it's too early to revise second half FY21 and FY22 forecasts.

While Morgan Stanley expects the banks to take a more conservative approach to provision releases, the Sydney lockdown is not expected to lead to higher individual provision charges in the June quarter.

National Australia Bank ((NAB)) is likely to be most impacted by a prolonged lockdown in NSW, given its larger SME franchise, suggests JP Morgan.

In concluding comments, the broker feels the trajectory for medium-term major bank impairment expenses rests on whether current lockdown restrictions are successful in suppressing community transmission of the covid-19 delta strain, and the progress of the vaccine rollout.

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