NSW Premier Gladys Berejiklian and Prime Minister Scott Morrison (Image: AAP/Dean Lewins)

Surely Sydney will leave lockdown by the end of the current quarter — that is, the end of September?

If not, that would mean Australia’s biggest economic centre had been shuttered for 90 days and counting.

But with the numbers not shifting in Sydney after nearly six weeks of lockdown, and Gladys Berejiklian both admitting that the numbers had yet to peak and walking back her commitment to get Year 12 students back into the class room, the idea of negative first quarter for 2021-22 followed by another sprightly bounce-back is now looking shaky.

In fact Berejiklian seems to have given up on lockdown by itself driving cases back to zero, and is relying instead on vaccination to reach critical mass, despite the continuing lack of Pfizer supplies.

But that creates a devilish problem because, as all the modelling including the federal government’s own shows, even with 70% of eligible people vaccinated, we can still expect large case numbers, hospitalisations and deaths. And a well-vaccinated NSW with high case numbers is going to remain locked off from the rest of the country until they catch up, probably sometime in 2022.

That’s why the entire economy may end up paying a steep price for Berejiklian’s failure to lock down quickly enough and hard enough. Whatever her motives or “advice from the experts”, we now face the real prospect of Sydney dragging growth down into the September quarter. Thus we’re into “technical recession” territory.

For the moment, everyone’s assuming that the lockdown in south-eastern Queensland will be of far briefer duration — brought on by an alarmingly mysterious outbreak — but it looks certain to be extended beyond the weekend. Having gone quicker and harder than Berejiklian, Queensland is unlikely to do more than mildly exacerbate the contraction this quarter.

The first recession last year — our first in three decades — was unavoidable, and the Morrison government’s response, if at times untargeted, was strong and effective. But another recession will have been very, very avoidable, but for failures of leadership at both the state and federal level over the vaccination rollout, quarantine and decisions to lock down.

The Reserve Bank is unfazed, having declined this week to alter its position to begin slowly tapering its quantitative easing measures from September. But it meets again next month and can adjust its position at that meeting if it needs to. It retains its belief — based on the 2020 experience — that things will bounce back to the strong recovery we were enjoying before the Delta variant hit. It releases its latest economic forecasts tomorrow in the third Statement on Monetary Policy for the year. What were expected to be slightly higher forecasts for inflation and growth looking into 2022 and 2023 may not survive the obvious worsening of the situation in Sydney and southeast Queensland.

Business is already seeing the impact. Sydney-based furniture retailer Nick Scali told the ASX on Thursday morning that “trading during July 2021 was impacted by government mandated lockdowns in Greater Sydney, Victoria and South Australia, and written sales orders were down 27% compared to July 2020”. Sales still well up on July 2019, suggesting Australians are channelling cash freed up by travel restrictions and lockdowns into their homes, but it points to how much damage the current lockdowns will do.

As we’re discovering with Delta, however, what applied last year doesn’t necessarily apply this year. The next recovery — whether from a recession or simply a bad quarter — will occur as we start transitioning to “living with COVID”. It will occur during the run-up to a federal election, and as the federal government considers reopening borders, allowing much greater numbers of temporary workers back in. And in the face of a real threat of new lockdowns.

The federal government was already forecasting tipping over $100 billion of deficit spending into the economy this year, a bill that will be substantially expanded by the lockdown assistance it is currently providing and, likely, will continue providing for some weeks — far more than it will pick up from the iron ore price peak that would have juiced its tax receipts. It still has plenty of fiscal ammunition left if need be — thought it will be strongly tempted to pump it all into marginal seats given the looming election.

Our pandemic experience so far has been all about the intersection of health issues, economic concerns and political agendas. What no one seems to have worked out yet is how “living with COVID” in an election context turbocharges all three of those. Unless Berejiklian can get on top of the Sydney outbreak quickly, a recession is going to complicate all those matters enormously.