Australia is to keep quarantines in place. Photo: AFP/Peter Parks

Australia warned on Thursday that its economy would shrink at its fastest pace in history during the second quarter, while the budget deficit will be the biggest since World War II as the country battles to contain the impact of the coronavirus.

The government has stumped up tens of billions of dollars to fight the pandemic, which has ravaged global trade and forced the shutdown of much of the country earlier in the year, crippling the economy.

The reimposition of a six-week lockdown on five million people in Melbourne, the second-biggest city, has added to the struggles for a country already reeling from a prolonged drought and massive bushfires before the disease struck.

Officials said gross domestic product would contract 7% in April-June, pushing the economy into recession for the first time in nearly three decades.

A recession is defined as two consecutive quarters of contraction and the economy shrank 0.3% in the previous three months.

Treasurer Josh Frydenberg also said the budget deficit would blow out to A$185 billion (US$132 billion) – almost a tenth of GDP – in the year to June 30, having hit A$86 billion in the previous 12 months.

“These harsh numbers reflect the harsh reality we face,” Frydenberg said. “The economic outlook remains very uncertain.”

Much of the forecast deficit comes from massive stimulus spending designed to keep the economy afloat and prevent a full-blown economic depression. 

The government has rolled out about A$289 billion in economic stimulus to cushion the country from the virus fallout, Frydenberg said, including support for workers, businesses and retirees.

Unemployment, now at a two-decade high of 7.4%, is expected to peak at 9.3% in December.

The Australian dollar dipped 0.3% Thursday, while shares on the S&P/ASX 200 were flat.

However, the government is predicting a quick recovery with the economy returning to growth in the third quarter as easing virus restrictions bring increased activity.

Frydenberg also predicted GDP would grow 2.5% in 2021, partially based on the assumption that international borders would open from January 1.

Australia has recorded more than 13,000 cases of Covid-19 and 133 deaths from the virus.

The government is expected to deliver its budget in full in October, while economic growth figures are released in September.