According to data released by the Australian Bureau of Statistics (ABS) on Wednesday, Australia's gross domestic product (GDP) fell by 1.9 percent in the September quarter.
The data covers July, August and September when about half of the Australian population in Canberra, Melbourne and Sydney was in lockdown in response to COVID-19 outbreaks.
It is the third biggest GDP fall in recorded history, beaten only by a 6.8 percent contraction in the second quarter of 2020 and a 2.0 percent fall in the June quarter of 1974.
However, GDP remained 3.9 percent higher than at the same point in 2020 and Australia has avoided a second pandemic recession.
The result was better than the 2.7 percent decline forecast by most economists.
"Today's national account numbers are very much a lockdown story," Treasurer Josh Frydenberg told reporters.
"The Australian economy is recovering strongly. And nowhere is this more clearly shown than in the labour market, with 350,000 jobs coming back since the start of September."
Spending on services including hospitality, recreation, culture and transport fell 5.8 percent from the June quarter while household consumption expenditure, which covers all the everyday needs of households, fell 4.8 percent.
The household saving to income ratio, the portion of Australians' earnings that they put into their savings, rose from 11.8 to 19.8 percent.
Sean Crick, acting head of national accounts at the ABS, said non-lockdown states helped offset the economic damage of strict restrictions.
"Household spending in New South Wales, Victoria and the Australian Capital Territory fell 8.4 percent, compared to the other states which rose 0.7 percent," he said in a media release.
"The fall in domestic demand was only partly offset by growth in net trade and public sector expenditure."
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