A delayed, but not denied, economic effect

New Zealand’s swift shift towards Alert Level 1 has seen the economy regain momentum more quickly than we had anticipated in the initial stages of the pandemic. Despite a feeling of cautious optimism around the country, we believe those gains will be lost as the economic realities of COVID-19 set in, with New Zealand an isolated lifeboat amid a tempest of global mayhem.

A spring in our step?

New Zealand remains free of community transmission of COVID-19, with any new cases being caught at the border. With no cases outside managed isolation and quarantine facilities, Kiwis appear to be moving and spending again.

Recent data releases point towards some rapid rises in activity. Electronic card spending, house prices, and business confidence have all created some positive headlines in recent weeks.

However, it’s critical to point out two major caveats. Firstly, anything will look better than it did during the Level 4 lockdown. And secondly, a post-lockdown bounce in activity was always expected. So although things are looking up, it can hardly be said that they’re back to normal.

  • Electronic card spending over the June quarter was only operating at 85% of 2019 levels, meaning that businesses are still missing $2.5b from what “normal” spending should have looked like.
  • House sales remain down 21%pa over the two months to June 2020. Although house prices are still up 8.6% from a year ago, they have actually edged 0.5% lower over the last three months (seasonally adjusted).
  • Even with businesses’ assessment of their own activity rebounding since April, July’s preliminary reading of -6.8% from ANZ is still 33 points below its long-term average and weaker than at any time since early 2009.

A delayed, but not denied, economic effect

New Zealand is also still riding the wave of incredible – and mostly temporary – support for the economy from the government. There are four major supports that are worth mentioning.

  • The wage subsidy and wage subsidy extension – the latter stops taking applications on 1 September and finishes protecting workers on 27 October
  • The COVID-19 Income Relief Payment (CIRP) – called by some a “benefit premium”, is for jobs that are lost by 30 October and will finish paying the last recipients on 22 January 2021
  • The mortgage holiday scheme, which is set to end around September 2020
  • The Reserve Bank’s Large Scale Asset Purchase programme – currently worth $60b, this scheme has driven interest rates and is set to stick around for longer

Once these supports are removed over coming months, the harsh realities of the economic landscape will be exposed. Business will rationalise their operations, and households will spend less.

At present, we see the New Zealand economy moving through four broad stages:

  1. Immediate hit (March – mid-May 2020), due to the Level 4 lockdown and Level 3 restrictions
  2. Sugar rush (mid-May – July 2020), due to the rebound in activity under Level 2 and 1
  3. Wait-and-see (August – September 2020), as the economy moves ahead with reasonably optimism activity levels
  4. Shoulder slump (October 2020 – 2021), as some of the major transitionary and temporary supports are removed from the economy, businesses and households look to the year ahead, and activity levels take a hit

A still-looming lay-off

We are still seeing rising job losses and additional support provided by the wage subsidy extension.

  • There are now more than 200,000 Kiwis on Jobseeker Support benefit or CIRP, of which 60,000 have been added since 20 March.
  • This rise in numbers has taken three months, compared to 21 months for an increase of 65,000 people receiving the equivalent of Jobseeker Support following the GFC.
  • There is a growing second wave of job losses, with nearly 16,000 more people claiming support over the last five weeks (see Chart 1).
  • There are 372,000 jobs covered by the wage subsidy extension, pointing towards a significant number of firms that are still suffering a 40%pa drop in revenue even under Alert Levels 2 and 1.
  • Just under 48,000 additional new jobs have been covered by the wage subsidy or wage subsidy extension in the last four weeks. These new jobs being covered highlight that many businesses are still in a tough place and now require support. 

We continue to expect that, once the wage subsidy extension ends in September, businesses will be forced to reassess their operations in light of lower spending and investment across the economy. With this reassessment will come further job losses.

Global activity deteriorating, leaving NZ alone in the cold

Meanwhile, as New Zealand grapples with our internal economic woes, the World Health Organisation has signalled that the global COVID-19 pandemic is “going to get worse”.

Case numbers are rising in the US, Brazil, India, and South Africa, with a resurgence in cases reported in Australia. Overall, daily case increases continue to head higher still (see Chart 2).

The rise in cases in Australia has closed the door on a trans-Tasman bubble any time soon. At present, our view is that a trans-Tasman bubble before early 2021 seems optimistic, underscoring the likelihood that international tourism will remain non-existent for an extended period.

International education also seems to be off the table, with a letter from the head of the Ministry of Education noting “given the uncertainty of the border, if I was a principal I would plan for no students until 2022.” The government is showing a lack of any urgency or interest to this industry that was previously worth $5b.

Globally, economic activity is rebounding from lockdown lows, but is still considerably weaker than normal. The soft global economy will weigh on the outlook for Chinese growth as well, with demand for Chinese products remaining subdued.

These three factors will dampen New Zealand’s export prospects. Our post-COVID recovery will thus be a strung-out affair, with the economy taking an extended period to  claw its way back to pre-pandemic activity levels.

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