Unemployment won't fall back to 5pc for four years: BNZ

Tuesday, 31 March 2020

The BNZ has issued a grim warning about economic activity and joblessness as a result of the coronavirus outbreak.

Its head of research, Stephen Toplis, says that unemployment could spike to 10 per cent and take more than four years to sink below 5 per cent again.

This, even though the economy is expected to rebound strongly after the lockdown lifts – 'the bigger the fall, the bigger the bounce,'

Regardless, Toplis said, 'things will not return to normal for a very long time'.

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'We believe it will not be until sometime in 2023 that activity will return to pre-crisis levels, at the very earliest.

'And we would be surprised if the unemployment rate fell back below 5 per cent before 2025.'

Toplis outlines the shape of the post-virus business world, a world he believes will see many people continue to work from home and favouring online conferencing.

But he stressed that economic forecasts are very hard to make at present, because the data is so uncertain.

All that economists could agree on was that the hit to the economy would fall in the second quarter, that it would be unprecedented – forecasts range between between 10 per cent and 33 per cent less GDP –and that there would be a recovery.

'If we assume the lockdown lasts for just 28 days, and things return quickly to normal, then the decline in economic activity would be 10 per cent. This, in a nutshell, would be the best case scenario.'

Some parts of the economy could not bounce back quickly, and others would face structural issues that would transform them forever.

International travel would recover only very slowly and domestic travel would be limited by virus hotspots.

'Even if New Zealand wins the battle against Covid-19, it is unlikely the rest of the world will do so any time soon,' Toplis said.

'Realistically, the threat of infection is likely to stay in place for up to two years. This will be a major impediment to travel for an extended period of time.'

Many hospitality businesses would close forever given the current shock, consumer debt levels would rise, and discretionary spending would take a major hit.

And the world of work would be different. Firms would be reluctant to fully re-staff until such time that there is certainty that the virus will not re-emerge.

'Additionally, there will be those who realise they can produce the same output with lower staff numbers.'

Many people would remain working from home, having talked about it but having 'never really embraced the concept. Now we know that it can be done, the need for office space could well diminish.' 

Last but not least, Toplis said, tax would rise or government spending would become very tight.

'There is no free lunch. The Government is spending up a storm. Its debt levels will rise explosively. Ultimately, someone will have to pay for this via increased taxation and/or heightened fiscal austerity.'