Treasurer Josh Frydenberg says whether the Australian economy can avoid a second recession in as many years will depend on the success of the lengthy NSW lockdown.
Economists have further downgraded their forecasts for the national economy in the September quarter, with the country's most populous state now facing stiff restrictions until the end of August.
"My expectation is that the September quarter will be negative," Mr Frydenberg told ABC television on Thursday.
"But with respect to the December quarter, that does depend to a large extent how successful New South Wales, our largest state economy, is in getting on top of this virus."
Two consecutive quarters of economic contraction constitutes a technical recession.
The federal government is spending billion of dollars - as is the state government - supporting businesses and workers during the shutdown through various packages.
But it comes at a time when national income is booming, particularly through the exporting of iron ore to China.
New Australian Bureau of Statistics figures show export prices surged 13.2 per cent in the June quarter to be 26 per cent higher than a year earlier.
In contrast, import prices rose by just 1.9 per cent and actually declined 2.5 per cent for the year.
Metalliferous ores and metal scrap export prices were up 18.5 per cent in the quarter, driven by the demand for iron ore from China and constrained global supply.
Over the year, prices in this category were 71.4 per cent higher.
The iron ore price is holding at around $US200 per tonne, below its recent record high but substantially above the $US55 per tonne forecast by March next year in the May budget.
At budget time, Mr Frydenberg said if the price remained elevated at around $US160 per tonne until March, it would add an extra $12 billion to the budget.
However, this will be of little consequence for Sydneysiders now in lockdown. New cases soared to a record 239 on Thursday and the death toll in the current outbreak is 13.
Greater Sydney is the country's biggest city and represents about a quarter of national output.
A number of economists have already downgraded their growth forecasts for the September quarter following the extension of the lockdown, ranging from a contraction of 1.2 per cent to 2.7 per cent.
But it is not all doom and gloom.
"It is our expectation that 2022 will be an incredibly good year for the Australian economy, provided the successful rollout of the vaccine means that COVID-19 restrictions are no longer imposed on the domestic economy," Commonwealth Bank head of Australian economics Gareth Aird said.
Prime Minister Scott Morrison agrees.
"It will take a short-term hit, there's no doubt about that, but our experience is the economy comes back strongly if you keep it as whole as possible, which is what we have done," he told Melbourne 3AW radio.
Australian Associated Press