The known unknowns in the NZ outlook

The New Zealand economy has been relatively resilient through the COVID-19 crisis so far but the outlook remains highly uncertain.

The downturn is still getting underway, there is noise in the data and much still to be learned about the true state of the economy.

Weighing up the outlook in the face of this uncertainty is a challenge for policymakers, businesses and households alike. But although much is unknown, there are some key features that will shape the outlook.

The New Zealand economy has weathered the COVID-19 crisis well to date. In part that reflects the elimination of the virus, and the temporary support provided by the likes of the wage subsidy.

Separate from that, businesses and households have been getting on with it, with spending and activity bouncing sharply out of lockdown.

The current downturn will be characterised by a number of phases. Thus far, we have weathered the disruption well, but there’s more to come that will test the resilience that we have seen to date.

Underlying momentum in the economy is unclear and data will remain noisy for a while yet. Add to that a wide spectrum of risks that could impact the outlook and the path ahead is highly uncertain.

ANZ Research’s central projection balances a number of risks, but there are wide bounds of uncertainty around any set of forecasts at present.

Currently, ANZ Research expects NZ’s gross domestic product to enter 2021 a full 3.5 per cent below pre-crisis levels, with the recovery taking until at least the middle of 2022. Inflation is expected to remain weak throughout 2021 and negative rates from the Reserve Bank of New Zealand are on the way.

Well placed

The COVID-19 pandemic is an enormous global challenge. Policy has been supportive to the extent it can be, but while the wait for a vaccine continues, the outlook remains difficult, with social distancing and renewed lockdowns prevalent.

NZ has been fortunate to avoid the same persistent economic impacts seen in other countries, but the effects of the global slowdown and closed border are still very real. As a small open economy, we are affected significantly by global developments, especially via export demand.

For goods exports, demand for what we produce has held up, but the outlook ahead will be more challenging and the elevated exchange rate has dampened returns for our primary producers.

Nonetheless, we are relatively fortunate. Even in a global downturn, NZ agribusiness remains well placed to feed the world.

In services exports, conditions are significantly more challenging and expected to worsen. Education exports are already seeing a significant gap. For tourism, a captive domestic audience has been enough to cushion the blow during the winter months, but the test will come during summer, when international tourists would usually provide a significant impulse to accommodation, retail, hospitality and other services industries.

The ability of Kiwis to travel will remain crimped and that will support tourism-exposed industries, but the offset will not be enough.

NZ is very exposed to international tourism, and with a closed border the economy is ultimately a smaller one – probably around 5 per cent smaller – even if that has not become fully evident yet due to seasonality.

As a consequence, we can expect to see less national income and spending for a time. ANZ Research assumes the border will not open until early 2022, which will be a boon for the industry at that time, given pent-up demand, even if spending power of tourists may be weaker than otherwise. For some in the industry, that will be too long to wait.

A closed border also affects NZ’s ability to source skilled labour. For some who lose their jobs, this may mean fewer competitors in the job market. For firms, this may make hiring even more difficult, especially since in some areas there will be more of a skills mismatch between labour required and available.

This could see pockets of wage pressure emerge, but also has the potential to weigh on economic activity. Inflation is expected to be weak, with demand lacking and firms not using all their production capacity. Yet there will likely also be some pockets of cost pressure in an environment where price increases are difficult to pass through, impacting margins.

Fewer migrants also means weaker growth in household spending and demand for housing, though this may take time to flow through and the housing outlook will be affected by offsetting forces.

For now, the housing market remains supported and building activity strong, supporting construction and related industries. Challenges lay ahead, especially as job losses mount, and the asset price cycle could turn. ANZ Research expects some wobbles to emerge next year.

Caution

Job losses are expected to rise as closed border impacts start to bite and fiscal policy supports from the likes of wage subsidies roll off. Firms’ reluctance to hire will become more entrenched as weak demand becomes clearer.

Wage costs will also be a relevant consideration, especially in tourism-exposed industries like retail and hospitality, with the minimum wage set to rise further.

For households, worsening job security is expected to weigh on spending, with households already a bit cautious about making major purchases. ANZ Research expects a theme of household wariness to remain evident, if not intensify, with households looking to shore up their financial positions and save more, particularly if there is any weakening in the housing market.

For businesses, there are significant reasons to be cautious, with the threat of renewed restrictions ever-present and the broader outlook highly uncertain. Although it has been encouraging to see business sentiment improve in this environment, ANZ Research expects firms to be reluctant to expand and invest, and in some cases employ, for a while yet.

The RBNZ have taken significant steps to make financial conditions accommodative, but an eventual recovery in investment will require a confident business sector, a recovery in demand, and an outlook that is more assured.

There are reasons to be positive about the outlook as NZ starts on the journey towards recovery in advance of many other countries and with progress being made towards an eventual vaccine. But ANZ Research remains of the view that although the path may be bumpy, on the whole the recovery will be slow.

Elizabeth Kendall is a Senior Economist at ANZ NZ

This story is an edited version of an ANZ Research note. You can read the original note HERE.