STATE OF THE NATION – JUNE 2020
Economic Update from Sharon Zollner – ANZ Chief Economist
The brakes have been sharply applied to global economic growth as countries have taken measures to slow the spread of COVID-19. Even as lockdown restrictions start to lift, global economic growth will continue to decelerate, and the fear of a second wave of infections is ever-present.
But New Zealand is in a relatively fortunate position. The virus has been eliminated in the community, but ongoing very strict border controls will be necessary to keep it out. That leaves us free to get on with our lives in ways people in other countries can only dream of.
Unfortunately, our prize is going to be a very large recession. The international tourism and foreign student industry accounts for about 5% of the economy, meaning that as long as the border is closed, the new baseline is a 5% fall in GDP. On top of that, we have to overlay the balance sheet damage done during the lockdown period and the fact that the sectors most impacted by this shock are the people-centric ones: tourism, hospitality, retail and arguably construction. That means that the hit to employment is going to be correspondingly larger than it would be if the shock to GDP were purely to grass growth due to drought, for example.
The impact of the economic recession has been delayed in many countries, including New Zealand, by measures taken by governments and central banks to stimulate economic activity and cushion incomes. Wage subsidies are a common strategy. The New Zealand wage subsidy scheme is currently supporting 60% of those employed. These subsidies are extremely expensive and can’t go on for ever. The 8-week extension is for a smaller number of firms. As the subsidies are withdrawn, a large number of jobs are unfortunately also likely to disappear.
While uncertainty is very high, we are forecasting the unemployment rate to exceed 10% later this year. We haven’t experienced this level of unemployment since the early 1990s. Falling employment and job security then itself feeds into lower household spending, providing a second-round hit. It’s all connected and feeds on itself both on the way up, and, unfortunately, the way down.
The housing market is very closely tied to New Zealand’s economic cycle, which is tied into the fact that we’ve tended to have very large migration cycles too. House prices were at record highs, relative to incomes, going into this recession, and so we have to be realistic that we could see some pretty decent falls. At the moment, we’re in the classic stand-off period when buyers and sellers have quite different notions of what a given house is worth. However, high unemployment means that some people will have to sell a property because they’re abruptly unable to service their debt, and this will see price falls eventuate. The outlook for migration is extremely unclear, but the basic fact is people move here for jobs, and there are going to be fewer of those, and enormous pressure to hire kiwis first. All up, we see house prices falling 10-15%, and falling paper wealth does tend to further reduce household spending. Record-low mortgage rates will certainly be tempting for some, but on the other hand some will be wary of becoming landlords at a time when a higher number of people will be facing difficulties in paying their rent.
As well as cutting the Official Cash Rate to just 0.25%, the Quantitative Easing (QE) programme launched by the Reserve Bank is putting further downward pressure on interest rates and providing considerable liquidity to the banking system, ensuring that supply of liquidity is not a constraint on lending. We expect the RBNZ will expand their QE programme from $60bn to $90bn by August. This will help absorb the additional bonds the Government plans to issue to pay for the fiscal stimulus planned in the recent Budget, and hopefully keep a cap on bond yields going forward. If more stimulus turns out to be required down the track, the RBNZ could expand QE to other assets or even introduce negative interest rates, but the further down the unconventional monetary policy rabbit hole we go, the more structural damage is done to the economy. We expect the Reserve Bank will tread carefully for this reason.
A welcome bounce as the disruption of lockdown eases is currently providing a feel-good factor. However, such a large hole in the economy will make itself felt. The media is full of stories of redundancies, particularly in the retail and tourism sectors. More will come as the wage subsidies roll off. We are in the best case scenario, but unfortunately in a global pandemic the range of scenarios available isn’t great. As a small, open economy New Zealand is exposed. The outlook for NZ’s economy is certainly bleak in the short term. Monetary and fiscal stimulus will help the recovery in the medium term, but we have to be realistic that it’ll be a slog, with the outlook for our trading partners so subdued. We anticipate GDP will fall 8-10% in 2020, with the economy not making a full recovery until 2023.
Huge uncertainties remain. In particular, a big part of the reason for the slow recovery is the closed border. No monetary or fiscal stimulus can realistically offset the fact that international tourism has ground to a halt. That sector accounted for around 3% of GDP directly and almost as much indirectly, via its impact on retail and hospitality. It also earned as much foreign exchange as the dairy sector. It will be greatly missed. The big hope is a trans-Tasman bubble, but with Australia still experiencing double-digit new COVID-19 cases most days, it looks unlikely to occur any time soon. It should also be remembered that while Australians might flock to Queenstown, New Zealanders heading to the Gold Coast rather than Northland subtracts from GDP on the other side.
New Zealand has kicked COVID-19 to the kerb and should be proud. However, globally, there’s been a seismic shift. Our economy will adapt and find new opportunities. But it’ll be a painful process, and it’ll take time.
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