NZ & the eventual recovery

The world is in the midst of an unprecedented health and economic crisis. The COVID-19 pandemic is wreaking havoc on lives and livelihoods, including here in New Zealand.

Unprecedented activity restrictions have been broadly successful in their health aims but have stopped the global economy in its tracks. The economic slump underway is truly enormous.

Rightly, the crisis has galvanised policymakers with governments and central banks taking unprecedented steps to cushion the blow and ease pressures in financial markets. Nonetheless, the impact of this crisis will be with us in months and years to come.

The path from here is even more uncertain than usual, but economic pain is inevitable. ANZ Research expects to see a sharp hit to New Zealand gross domestic product over the first half of calendar 2020.

The magnitude of this and the subsequent bounce in activity will depend on whether the outbreak can be contained sustainably, the duration of activity restrictions, and the path to reopening the economy.

Even though New Zealand is doing very well in its battle against the virus, enormous fiscal and monetary stimulus could be required through this period to support households and businesses that are under pressure. Even with stimulus, NZ unemployment is likely to increase to 11 per cent and even once the lockdown dust has settled, GDP at the end of the year could still be 8 per cent to 10 per cent down on where it was a year earlier.

The eventual recovery is expected to be slow, with the current slump causing significant persistent damage. And the international tourism sector, a very large earner, is out for the count. Uncertainty will take a while to dissipate and households and firms will look to reduce their debt levels, dampening demand for a long time.

Despite the body blow to tourism, ANZ Research expects to see a net export-led recovery, with the domestic economy for its part supported by enormous fiscal and monetary stimulus.

The economy will not return to its previous trend, but over time it will find a new equilibrium. Some industries will need to change and may well be smaller, while other parts of the economy will benefit.

There are plenty of challenges ahead. But as the economy evolves, there will be opportunities.

Halt

The world is currently navigating a health and economic crisis not seen before in modern times. The highly restrictive measures required to slow the spread have brought the global economy to a halt.

The world is now in the midst of a deep global slump. Job losses have been immediate and firms are under pressure. Non-essential spending and investment has all but ceased. Global trade has plunged.

Financial markets have experienced significant volatility as the crisis has unfolded. Equities took a hard hit initially, and while they have recovered somewhat as central banks have provided liquidity, they remain vulnerable to reduced earnings as global growth slows.

Currencies normally depreciate when a country’s growth prospects deteriorate, but it’s a zero sum game, and every economy is taking a hit at the moment. The NZ dollar has depreciated over recent months, as is usual when risk sentiment deteriorates, reflecting the country’s exposure to global trade and tourism.

However, some support for the NZ dollar has been seen in recent times, with the outbreak more contained here and demand for NZ’s primary goods exports holding up relatively well compared to demand for many commodities and manufactures. Government bond yields have fallen significantly, although credit risk concerns associated with fiscal easing and potential business difficulties have also been percolating, causing volatility and providing some upward pressure at the long end.

The Reserve Bank of NZ has been pretty successful in heading that off with quantitative easing, buying government bonds in the secondary market, enabling the Government to expand its borrowings without putting upward pressure on interest rates.

Caution

New Zealand, like many countries, is in lockdown to control the spread of the virus. The country took a relatively cautious approach compared to the rest of the globe, as shown both by policy measures and use of data about people’s movements.

Fortunately for NZ, the country was able to adopt strict measures at an early stage of the outbreak– and encouragingly, it has worked, with the number of new daily cases falling to zero for the first time.

While the progress made suggests an easing in activity restrictions is now possible, opening up the economy will not be straightforward. There is an ever-present risk of a renewed outbreak until a vaccine or effective treatment is available. The reality is it may be a long time until we will return to anything resembling normal, with activity restrictions and tight border controls expected for some time.

Although policy initiatives in NZ have been helpful, economic pain is inevitable. The lockdown has seen a slump in GDP and significant job losses. Even once the economy reopens, social distancing – required or voluntary – will be with us for a long time.

However, NZ is in a better spot than most countries, with a much better shot at keeping case numbers very low without returning to economically painful lockdowns. Australia is achieving similar success, opening up the tempting prospect of a trans-Tasman bubble that could offer a glimmer of hope to the battered tourism sectors in both countries.

Clearly, the near-term economic hit is enormous. But the economic impact in coming months and years will depend on many things:  the trajectory of the outbreak, in NZ and globally; what happens after lockdown; whether the virus is eliminated; the size and duration of policy responses; and how households and businesses respond.

It should be remembered that the outlook from here is highly uncertain. Ultimately, we are living through an unprecedented economic shock – with massive consequences – that we could not foresee. And it has the potential to reshape our world.

Sharon Zollner is Chief Economist at ANZ NZ