MELBOURNE (BLOOMBERG) - A renewed Covid-19 outbreak in Australia's second-largest city is marring the country's reputation as a standout in suppressing the virus, and risks further damaging a regional economy that relies heavily on international tourists, students and migrants.

Melbourne, capital of Victoria state with a population of just under five million, has locked down 12 areas after recording 127 cases overnight, its biggest daily increase.

Over the weekend, Victorian authorities took the toughest control measures to date in Australia, barring 3,000 residents of nine public-housing towers from leaving their apartments.

Victoria doesn't have the natural resources that other Australian states have, leaving it heavily reliant on population growth, international students and tourists, said Mr Alex Joiner, chief economist at IFM Investors in Melbourne.

"Those drivers of growth aren't coming back anytime soon," Mr Joiner said. "As it becomes more obvious that Victoria is suffering a different type of crisis to the other states, that would deter domestic tourism as well."

Once known as the nation's manufacturing powerhouse, Victoria has pivoted to international services as Australia's economy de-industrialised.

Its two largest exporters by value are the University of Melbourne and Monash University.

It's also a major tourist draw, hosting international sporting events like the Australian Open tennis championship, the Formula One Grand Prix and Melbourne Cup horse race.

The state remains a significant economic player: In 2018-19, Victoria contributed 23.7 per cent of Australia's gross domestic product, or just under A$400 billion (S$388 billion), and second only to New South Wales' 32.6 per cent.

Its importance suggests that the federal government, in its July 23 economic statement, may have to direct more support to Victoria even if it winds back stimulus to other areas.

WHAT BLOOMBERG'S ECONOMISTS SAY

Economist James McIntyre said: "Over the past five years Australia's economic momentum has swung to the south-eastern states as the mining investment boom ebbed. Victoria has been an epicentre of that growth momentum. Surging population growth drove a housing construction boom, alongside a services sector surge that outweighed the drag from the shutdown of Australia's vehicle manufacturers.

"While the escalating outbreak in Victoria will temporarily remove a key region from Australia's post-shutdown recovery, there are emerging signs that Australia's agriculture and mining sectors could offer important offsets for Australia's macro - but not necessarily labor market - outlook over 2H 2020 and beyond."

Even before the renewed breakout, Victoria was a laggard in bringing the virus under control.

That shows in the state's slow hiring recovery, with employment down a net 7.6 per cent from pre-pandemic levels, the worst of any state and lower than the 6.4 per cent average decline for the country as a whole.

"All of the mobility data, the Google and Apple stuff, shows that Victoria is lagging the rest of the country in emerging from the lockdown, and is about to overtake Tasmania as the state which has had the highest number of cases per head of population," said Mr Saul Eslake, an independent economist who has observed Australia's economy for four decades.

There are reports of renewed panic buying in Melbourne, reminiscent of the frenzy in Australia's other major cities in March to stock up on toilet paper as the national lockdown began.

For the central bank, which meets on Tuesday (July 7) and is expected to keep its cash rate and three-year yield target unchanged at 0.25 per cent, the greater worry will be the threat to confidence.

Consumption makes up about 60 per cent of Australia's economy and nervous households could opt to save instead of spending and choke off the recovery.

Victoria's outbreak is expected to postpone any plans for Australia to reactivate international travel with other countries that have contained Covid-19, such as New Zealand and Thailand, said Ms Yin Yeoh, a senior industry analyst at IBISWorld.

Tourism and hospitality industries such as restaurants and cafes are expected to continue to struggle this year and next, Ms Yeoh said.

"While Victoria has been the first Australian region to experience a second wave of Covid-19, it is unlikely to be the last," she said.

"Local outbreaks and lockdowns are likely to be the new normal for some time."