* Q3 GDP -1.9% q/q vs forecasts of a 2.7% drop
* Household spending hit by lockdowns, but not as bad as feared
* Recovery underway as restrictions ease, shoppers return (Adds detail, analyst comment)
By Wayne Cole
SYDNEY, Dec 1 (Reuters) - Australia's economy slammed into reverse last quarter as the Delta outbreak put half the population under lock down, though a speedy recovery is already underway as world-beating vaccination rates set Sydney and Melbourne free.
The emergence of the Omicron strain is a new threat to the outlook, but with 87% of the adult population now double dosed the government is determined to keep the economy open.
The damage done by self-imposed shut downs was all too evident in Wednesday's report on gross domestic product (GDP) which showed output fell a steep 1.9% in the third quarter.
That was still better than markets forecasts of a 2.7% decline and relatively moderate compared to the 6.8% quarterly slump suffered last year when the pandemic first struck.
The annual pace of growth slowed to 3.9%, from 9.6% in the second quarter, but again beat forecasts of 3.0%, and analysts were optimistic the loss would be quickly recouped.
"We expect GDP to surpass its pre-Delta peak this quarter already and to keep surprising to the upside next year," said Marcel Thieliant, a senior economist at Capital Economics, who predicted growth of 5% for 2021.
"With the household savings rate jumping to 19.8%, there's enormous scope for consumption to recover over the coming quarters," he added.
The Australian Bureau of Statistics noted savings had been fattened by government support payments and stock dividends, as well as the enforced curb on spending.
In all, household consumption dropped 4.8% in the third quarter to overshadow strength in government spending and net exports.
Yet the consumer is also leading the recovery with retail sales soaring 4.9% in October as restrictions were lifted. Data from bank cards show November was also a strong month, culminating in a bumper Black Friday for retailers.
Consumption has been underpinned by a big build-up in savings and a surprisingly resilient labour market, where payrolls recovered all their lockdown losses in October.
Supporting spending power is a boom in house prices, which were up 22% in the year to November. The median home has risen an average A$2,436 ($1,737) every week for the past year.
Super-loose monetary policy is another stimulant as the Reserve Bank of Australia (RBA) seems determined to keep interest rates at a record low of 0.1% for some time yet.
The central bank holds its last policy meeting of the year next week and is again expected to signal that no hike is likely until at least 2023.
Markets are wagering a move could come as early as July next year given the spike in global inflation, though price pressures are not nearly as hot with the main GDP measure of domestic inflation up 2.3% in the year to September. ($1 = 1.4023 Australian dollars) (Reporting by Wayne Cole; Editing by Shri Navaratnam)