SYDNEY (REUTERS) - In Australia's largest city, construction has come to a standstill for the first time in living memory as a surge in Covid-19 cases puts Sydney under its toughest lockdown since the pandemic began.

Tradespeople are out of work, with a knock-on effect seen on other sectors including retailers and cafes, as the Delta variant of the coronavirus darkens the outlook for Australia's US$1.5 trillion (S$2 trillion) economy, one of the few to have successfully navigated the pandemic in 2020.

Now, some analysts see the economy shrinking this quarter, the first decline since June 2020, amid suggestions Sydney could remain in lockdown indefinitely.

Treasurer Josh Frydenberg concurs, saying in a televised interview the September quarter will probably "be a negative". The sudden change in Australia's fortunes brought on by the Delta variant comes as policymakers in other developed countries begin to have second thoughts about rapidly reopening their economies.

"I don't think everybody appreciates how contagious this strain is and how different it is from past strains," said Ms Gladys Berejiklian, premier for New South Wales (NSW), of which Sydney is the capital city.

Ms Berejiklian, who controlled previous virus outbreaks without imposing widespread lockdowns, first locked up Sydney on June 26 and has since tightened restrictions banning construction activity, shutting down non-essential retail and urging employers to reinstate strict work-from-home policies.

The construction sector accounts for around 9 per cent of Australia's annual output, while retail makes up more than 4 per cent.

"Delta has beaten every single jurisdiction in the world," said Ms Berejiklian, calling the variant a "game changer" and flagging some level of restrictions could remain in place until the vaccination rate goes up.

Economists, who have been quick to downgrade estimates for Australia's economic growth, warn a longer lockdown will have dire consequences as NSW accounts for a third of the nation's output.

They also think the central bank could be forced to reverse a decision made earlier this month to begin tapering monetary stimulus from September.

"The developments are concerning because things have not moved in the desired direction on the Covid-19 front, particularly in NSW," said Mr Gareth Aird, head of Australia economics for Commonwealth Bank.

New South Wales reported 124 new Covid-19 cases on Thursday, versus 110 a day earlier, a record for this year and the highest in 16 months despite weeks of lockdown.

"We cannot discount the scenario where the lockdown continues indefinitely until the proportion of the population vaccinated hits a level that policymakers deem acceptable to reopen the economy," Mr Aird added.

Hanging heavy on outlook is a botched-up vaccination roll-out, with under 12 per cent of the population fully inoculated, together with recurrent leakage of the virus into the community from quarantine hotels.

The grim outlook sharply contrasts with the success Australia boasted only months ago, as the economy rebounded quickly to above pre-Covid-19 levels after its first recession in three decades.

Apart from early success in curbing the virus, massive government support had helped last year, though this time around, support payments are not as generous.

Stagflation risks

As a result, businesses and workers are growing increasingly frustrated with the on-again, off-again lockdowns.

National carrier Qantas this week warned its staff may be stood down without pay if lockdowns continued for extended periods.

Australia's second-most populous state Victoria is in its fifth lockdown and smaller South Australia also ordered its residents this week to stay at home as cases of the Delta variant flare like wildfires.

Electronics giant JB Hi-Fi this week warned its sales have suffered through July.

ANZ's High Frequency Indicator Index, which combines a variety of mobility data and restaurant bookings, is now in negative territory and at its lowest since October 2020.

For smaller firms such as Sydney-based Ianotti Electricals, the lengthy delays mean thousands of dollars of lost business.

"I've had to leave bathroom and kitchen renovations midway. There were new works we were supposed to start too, that's not happening," said Mr David Ianotti, whose father owns the business.

"I am doing some work like finishing up paperwork, cleaning my van et cetera, but it's all unpaid work."

Australia is not battling the Delta variant alone.

A resurgence of cases globally has hit sentiment in world share markets and cast a shadow over rosy predictions for economic growth as more countries reimpose restrictions.

"The Delta variant could fuel worries about stagflation, which is a terrible combination of slowing economic growth and inflation at the same time," said Ms Nancy Davis, a portfolio manager at Quadratic Capital Management, which has US$3.2 billion in assets.

"Stagflation is an even bigger risk for investors than inflation."