An Economic Outlook of the Covid-19 Situation

New Zealand is now in lock down & is preparing for the repercussions on the economy from this time of isolation. The economists from ASB share their views on the impacts of COVID-19 on their forecasts. Their latest Economic Note from the 27th of March states,

“2020 faces considerable economic challenges, some of which have not been experienced in our modern history. COVID-19 has morphed from a potential (and modest) downside risk to a global pandemic with severe economic repercussions for the NZ and global economy. Much of NZ is currently in lock-down mode: the NZ authorities have done the right thing and put health first, while also cranking up policy support to help reboot the economy. We have attempted to illustrate the potential short-term impacts of the shut-down and COVID-19 on the NZ economic outlook. It will crucially depend on the length the shutdown, the portion of the economy that will be impacted and the extent to which activity in affected areas will be disrupted. These are still unknown and there could be a range of potential outcomes. However, it seems more likely than not that quarterly movements in NZ GDP will be massive (but hopefully short-lived), with easily the greatest quarterly volatility seen on record.
The NZ economy is set to contract by considerably more over 2020 than what occurred during the early 1990s downturn and the Global Financial Crisis (GFC). We expect the subsequent recovery to be gradual, with widespread caution evident and the focus on safety and saving rather than a sudden release of the spending shackles. Household, corporate and even the Government’s balance sheets have been hit and will need time to recover. Potential growth prospects for the economy (i.e. its speed limit) will also be more modest. These constraints will blunt the impact of low interest rates and government support for a while yet. Eventually we expect the economy to recover, but it won’t be until late 2022 that NZ economic activity is above late-2019 levels. The OCR is unlikely to move higher until 2024. There will be widespread economic repercussions. There will be firm closures and job losses, particularly in sectors that have seen a persistent knock to their fortunes, but the actions of policymakers will partly stem the tide and prevent the unemployment rate hitting double digits. Policy support will also play a key role in limiting the (modest) falls we expect for nationwide house prices over 2020. The cost of this policy support is evident when looking at the Crown balance sheet, with government debt levels set to climb sharply.

This is a time to really put together as a nation. The lockdown gives time to plan for restarting in a changed world.

Key messages

The economy is going into a deep but short-lived contraction. It’s going to be painful, but it is entirely necessary to avoid even worse health and economic outcomes further down the track. No one knows how deep the hole is or precisely how long it will take the economy to recover. But, the important point is that the economy WILL recover.
The response by NZ’s policy makers has been timely, and appropriately aggressive. The fallout on NZ’s labour market, housing market and economy more generally will be limited greatly by the decisive actions we’ve seen to date. We’re confident they will work to support the economy as we endure the lockdown, and then stimulate the economy as we emerge.
It gives us the best chance of emerging from this crisis in reasonable shape compared to some. But how the rest of the world fares in this still matters a great deal for us, given NZ remains a trade-dependent economy. It’s a well-worn cliché, but it’s true that we’re all in this together.
There will be sectoral, regional, and employment differences. Humans are incredibly adaptive and will find new ways of working, but this will be easier said than done for many. COVID-19 is a viral outbreak, and sectors that rely on person-to-person contact and the movement of people will face greater challenges. Providing that the Chinese economy manages to recover from its winter flu, prospects for NZ food exporters may not be as bad as they could be given the pending global downturn. Our Terms of Trade should hold up reasonably well, but we acknowledge the downside risks around this view.
NZ has more fiscal and monetary ammunition (than most). And policymakers have already shown boldly that they are not afraid to use it.
Don’t pay too much attention to point forecasts. Forecasting is tough at the best of times, borderline impossible now. The relevance of forecasts is also reduced in an environment where some firms are simply trying to stay afloat rather than doing any sort of planning for the future. We outline our updated outlook below and encourage you to focus on the story and risk profile, rather than the numbers.
Businesses on the front line of this shock will have the clearest sense of the impacts, and are thus best placed to figure out the way forward. Kiwis have proven themselves to be resilient and innovative. These qualities stand us in good stead as we tackle this thing.
Carpe (28) diem. Essential industries and businesses that are able to function during the lockdown will learn a lot about new work techniques. Others have time to plan for the future. Make the most of this unusual opportunity.
There is plenty of help out there from government and banks. Seek it out and encourage others to make use of it. Help others get through if there are things you can do that will make a difference.
Co-operation and caring matters. If we all pull together, follow official advice and look out for each other, it will be easier to get through this. Kia Kaha New Zealand.”

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