This pandemic is not over yet – not by a long shot

This article was first published on Thursday 13 August. It has been updated on 23 August to reflect the Prime Minister’s statement of 14 August.

The announcement of community transmission of COVID-19 in New Zealand has been a reality check on our progress towards recovery. With Auckland now under Alert Level 3 restrictions, and the rest of New Zealand at Alert Level 2, the economic outlook has turned darker. This note provides our initial analysis of the economic effects of the changes, as well as an update on how our view of the economic outlook is changing.

Further restrictions will hit economic activity

The shift down the Alert Levels in May and June saw life return swiftly towards normal, creating a feeling of optimism about the economic outlook. This optimism has now disappeared, with community transmission of COVID-19 in New Zealand, which will hit the economy when it was still trying to get back on its feet.

Many households and businesses had, to a degree, become complacent around planning for further changes. Businesses were in a strong position going into the first lockdown. However, throughout the last few months businesses have used up their spare funds, meaning that most will enter the current restrictions in a more vulnerable state, and we expect job losses to increase.

The greatest effect on the economy, besides the obvious activity restrictions, is that consumer and business confidence are set to slump again. Even prior to the new outbreak, the post-lockdown bounce in confidence measures was showing signs of petering out as reality started to set in.

Businesses must now consider being prepared for New Zealand to yo-yo through COVID-19 Alert Levels for an extended period. The Reserve Bank’s analysis from May underscores the seriousness of this yo-yoing, with economic activity sitting 19% below “normal” at Level 3 and 8.8% below potential at Level 2 (see Chart 1).

Targeted support for businesses will be important. We support the resurgence wage subsidy, alongside work to understand how to support other regional economies if further restrictions occur. Industry-level support might also need to be considered, with an uneven distribution of lower activity expected (see Chart 2). More sustainable options to support the economy will be necessary if further restrictions across New Zealand are announced in the future.

Auckland’s economy will hurt, and needs support

Auckland makes up 38% of the New Zealand economy and therefore is critical to the country’s fortunes. This size and strategic importance means that any disruption in Auckland will naturally pull New Zealand’s economic activity lower.

Infometrics estimates show that 28% of Auckland employment – around 250,000 workers – will be unable to operate at Alert Level 3. As we anticipated, Auckland is under Level 3 restrictions until at least Wednesday 26 August, with the rest of New Zealand at Level 2.

Over the first three days of announced restrictions, initial Infometrics estimates are that spending in Auckland will be $60m-69m lower than usual. For the full 2 week period, total spending could fall by $341m. Our estimates are based on average national spending activity which sat at 60% of normal levels when Level 3 was in place during April and May.

More jobs will be lost in Auckland as a result of the restrictions, even if the government follows through with a regional wage subsidy. Businesses were still struggling before yesterday, and these latest developments will be the final straw for some.

Other regions will also feel the pinch

Over the year to December 2019, Aucklanders spent $3.5b on tourism across the country, representing around 20% of total domestic tourism spending. Some areas are more reliant on Auckland’s tourism dollar and will find it tougher to support local tourism businesses with the Super City cut off.

Ten areas across New Zealand receive 30% or more of their domestic tourism spending from Auckland, including four (Waikato District, Kaipara, Thames-Coromandel, and Hauraki) receiving over 40% (see Chart 3).

Just as importantly, the rest of New Zealand under Alert Level 2 has responded swiftly, with a reduction in activity noticeable in urban centres. Workers have begun working from home proactively, and businesses are operating under heightened caution.

Risk of COVID-19 remains a persistent and enduring threat

COVID-19 will remain a persistent threat, and moving forward, New Zealand businesses will need to factor in the risk of the country yo-yoing through Alert Levels.

Wage subsides to support businesses, although the right option at present, will need to be reassessed into the future. If New Zealand continues to experience outbreaks and higher Alert Levels continuously over the next few years, the cost of the wage subsidy will become prohibitive, and new options will need to be explored.

In essence, rebuilding for the future will require businesses to find ways to operate under tougher restrictions and conditions – the risk of community transmission is the “new” normal that keeps being discussed, and businesses need to factor this risk in.

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