STATE OF THE NATION – SEPTEMBER 2020
Economic Update from Sharon Zollner – ANZ Chief Economist
COVID-19 continues to wax and wane around the world, and made a highly unwelcome return to New Zealand’s communities last month, necessitating a second lockdown, albeit a less severe, regionalised, and (cross fingers) shorter one than the first round.
But New Zealand is still in a relatively fortunate position. Repeated elimination is absolutely the best strategy until the nation faces a better range of choices. Steady progress is being made on both vaccines and treatments globally. And in the meantime we have certainly learned from both incursions and have made improvements that mean the next time, if we have to have one, will be dealt with more efficiently still.
And indeed it had better be, as lockdowns are enormously damaging. The Government took much of the balance sheet hit of the first, extended lockdown via the wage subsidy, but the damage was considerable for hospitality and retail nonetheless. The damage done by COVID establishing itself permanently on our shores and making people scared to go out would be far greater, but repeated rounds of lockdown would have very nasty consequences for investment and employment. The bounce-back out of the first lockdown was vigorous, but much of it reflected one-off sources of spending: pent-up demand from when the shops were shut, and holiday budgets being spent on spas and e-bikes. Business confidence, consumer confidence and even weekly spending were all running out of puff before COVID reappeared. Remarkably, business sentiment measures have improved after the return of COVID, but they do remain at recessionary levels.
Part of the ongoing wariness of firms and households reflects that they are well aware that eliminating COVID doesn’t solve New Zealand’s problems. We estimate that the loss of international tourism and the foreign student industry wipes out about 5% of the economy, with the flow-on to retail and hospitality making it worse, and the fact kiwis can’t flee for warmer climes in winter providing an offset. And unfortunately, the sectors most impacted by this shock are the people-centric ones: tourism, hospitality, and retail. The hit to employment is going to be correspondingly larger than it would be if the shock to GDP were to agriculture, for example. That means that while there is a lot of uncertainty, it looks likely that the unemployment rate will rise meaningfully higher than it did in the 2008/09 recession.
Both fiscal and monetary policy are going all out to cushion the blow. The fiscal stimulus in particular is enormous, and it does mean that we find ourselves in something of a ‘phoney war’. The real damage will only become evident as measures like the wage subsidy and mortgage deferment scheme roll off. Tourism is also highly seasonal, meaning the income hit will be concentrated in the summer period. We see the economy being at least 5% smaller at the end of the year than before COVID eventuated.
The housing market is defying gravity so far, with interest rate cuts and easing of LVR restrictions more than offsetting uncertainty and rising unemployment. Housing markets are difficult to forecast at the best of times, and this is not the best of times. But partly because the RBNZ has now clearly laid out a path to a negative Official Cash Rate next year, we no longer expect house prices to fall as substantially, despite the rise in unemployment – something closer to a 5% fall is now looking more likely, with a relatively quick bounce back (similar to the last recession).
Avoiding a house price crash is most definitely a good thing, and the improved housing sentiment will be boosting spending. But with national income taking a big hit, housing resilience does have unfortunate implications for housing affordability, as well as wealth inequality. Divorcing asset prices from economic reality has become something of a speciality of central banks globally in recent years. As long as they succeed in that, super-low interest rates will boost borrowing and growth, but not necessarily via productive business investment and other types of spending that set economies up well for the future.
The Reserve Bank is also extending their quantitative easing programme, and has flagged a bank funding for lending programme to protect credit availability and allow lending rates to march lower than otherwise. The Reserve Bank will succeed in getting interest rates lower, we don’t doubt. However, as well as the question marks around the quality of the spending that results (not to mention the negative impact on savers), we would note that alternative monetary policy measures globally have been much easier to kick off than to wind up, and the end game is murky at best.
Huge uncertainties remain. When will a vaccine be available? Will people take it? More effective treatments? How often will COVID sneak past our defences? Will New Zealand’s commodity prices remain robust in such a marked global slowdown? Can we safely scale up the quarantine system? How should we balance the queue of ex-pat kiwis with specialised workers? Will we manage to get travel bubbles up and running or is the risk just too high?
New Zealand has options other countries don’t have, and we are fortunate in that regard. Our economy will adapt and find new opportunities. But there are no quick fixes. The world has changed and won’t be the same for a long time to come.
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