Economists say NZ economy recovering much faster than expected

As New Zealand closed its borders and prepared to go into level 4 lockdown, predictions of economic doom flew.

ANZ said it expected unemployment to reach 11 per cent and house prices to drop 15 per cent.Treasury suggested unemployment could get as high as 26 per cent without Government intervention.

But four months on, economists say the situation is better than expected and many of those predictions have already been revised.

Mike Jones, an economist at ASB, said the economy had “bounced out of lockdown in a perkier state than most expected”.

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“This reflects a combination of an earlier than expected shift down to alert level 1, the release of demand pent up during lockdown, and some well-timed Government support and stimulus measures, most notably the wage subsidy.

“The better-performing economy and extension to the wage subsidy have seen us gradually nudge down our unemployment forecasts in the months since lockdown. We now expect the unemployment rate to peak a little below 8 per cent, down from earlier forecasts of close to 10 per cent.”

NZIER principal economist Christina Leung said the recovery in heavy traffic flows, an indicator of freight activity and demand in the economy, had been stronger than expected since lockdown lifted.

“The extension of the wage subsidy to September is likely to be playing a part, as it allows businesses to keep workers employed for longer. And while the border restrictions have undoubtedly left a giant hole in international tourism activity, it has boosted retail spending in some areas as New Zealanders spend the money initially planned for overseas holidays on other things such as home renovations and clothing.”

Economist Shamubeel Eaqub said New Zealand had not experienced the same level of job losses as many other countries.

“The main thing is we are not killing people with Covid,” he said.

The health response had been sufficient that people could get back to almost normal life quickly. “We are not quite 100 per cent but largely, and that’s much more than what I expected.”

Infometrics chief forecaster Gareth Kiernan said he had noticed a “stark” disconnect between actual activity, what confidence surveys showed and economists’ expectations.

“I think the Government's support via the wage subsidy has played a role, although the jury is still out about how things pan out once that starts to roll off in September. 

“There also seems to be a substitution of spending from overseas holidays to domestic spending, including travel – somewhat expected, although it has exceeded expectations, partly due to the quick emergence from more restrictive conditions imposed by the Government.

“The Government's support for the housing market through the mortgage holiday scheme has also played a role in keeping the market on an even keel to date ensure the continued stream of returning New Zealanders has also helped.”

He said if there were no further substantial job losses reported by October or November, and if September’s GDP bounce-back was better than expected, “we might have to concede that we overestimated the negatives. We won't really have a clear picture until about December.”

ANZ chief economist Sharon Zollner said low mortgage rates were helping the housing market. ANZ now expects house prices will fall between 5 per cent and 10 per cent later in the year and says a bigger drop may be avoidable.

She said “big ticket” items were also selling well.

“But [that] doesn’t necessarily tell us much about the economy will settle once the involuntary savings from lockdown and the overseas holiday budgets have been spent,” Zollner said.

“There are essentially three distinct economic shocks going on: the lockdown and the rebound from it, the impact from the closed border; and the deterioration in the economies of our trading partners. The fact that the economy has rebounded quickly from lockdown doesn’t actually tell you much about how the other shocks will play out. The only thing I’m certain about forecasting is unusually high volatility in the data.”

Kiernan’s colleague Brad Olsen agreed the outlook was not clear.

“Although we keep talking about a bounce and surge post-lockdown, that surge hasn’t been massive. In most cases, the post-lockdown surge has taken us back to pre-lockdown levels of activity, rather than an oversized jump.”.

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He said, while spending figures in June 2020 were higher than a year earlier, Infometrics analysis of card spending data suggested that the total amount spent in the quarter was $2.5 billion less than in 2019.

“What New Zealand has seen over the last few months has been a strong uptick in economic activity after the economy was plunged into a four-and-a-half week coma, but the activity increases in recent weeks hasn’t been enough to fully plug the gap left by the lockdown,” he said.

“There has been considerable stimulus in recent months which is about to be withdrawn from the economy shortly, and at that point the economy’s realities will become clearer.

“What is important to note is that although the New Zealand economy has regained some momentum, some of the key drivers of New Zealand’s economic activity – international tourism, international education, and global trade growth, remain elusive over the year ahead. With these three pillars of New Zealand’s economic success missing and unlikely to be regained any time soon, the ability for the economy to improve even further appears limited.”

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Stuff