IMF expects New Zealand economy to shrink 7.2%

Wednesday, 15 April 2020

The International Monetary Fund says New Zealand's economy will shrink by 7.2 per cent this year as the effect of the Covid-19 outbreak, and subsequent lockdown, hits.

It has released its latest World Economic Outlook, which notes that the pandemic is having a severe impact on economic activity around the world, as well as inflicting 'high and rising' human costs. The IMF labels the economic downturn the 'Great Lockdown'.

The fund (IMF) expects the global economy to contract by about 3 per cent in 2020, a much sharper fall than that experienced after the global financial crisis.

New Zealand's economy is predicted to shrink by 7.2 per cent this year before growing 5.9 per cent next year.

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Advanced economies, including the United States, United Kingdom and eurozone are predicted to contract by 6.1 per cent this year, and emerging markets by 1 per cent.

Assuming the pandemic fades in the second half of 2020, the global economy is projected to grow by 5.8 per cent next year.

'The risks for even more severe outcomes, however, are substantial,' the IMF report says.

'Effective policies are essential to forestall the possibility of worse outcomes, and the necessary measures to reduce contagion and protect lives are an important investment in long-term human and economic health.

'Because the economic fallout is acute in specific sectors, policymakers will need to implement substantial targeted fiscal, monetary, and financial market measures to support affected households and businesses domestically.

'And internationally, strong multilateral cooperation is essential to overcome the effects of the pandemic, including to help financially constrained countries facing twin health and funding shocks, and for channelling aid to countries with weak healthcare systems.'

ANZ chief economist Sharon Zollner said the IMF predictions told a similar story to those of her team.

ANZ is expecting an 8.8 per cent reduction this year and 4.1 per cent growth in 2021. 'We see a slightly larger fall this year and a smaller bounce-back next year but the profile is similar.'

NZIER expects a GDP fall of 10.9 per cent this year and a 9.7 per cent recovery next year.

'However, as the Finance Minister highlighted in the release of Treasury scenarios yesterday many factors come into play: length of time New Zealand is in lockdown, how successful NZ is in eliminating or suppressing Covid, and the amount of further fiscal stimulus the Government will put in to support the economy,' said principal economist Christina Leung.

'Our current forecasts incorporate a scenario that is similar to scenario one in the Treasury projections – that we only have to spend one month in lockdown. However, unlike the Treasury we do not expect the New Zealand economy will return to its pre-Covid trajectory by 2024. We expect the negative effects will be much more persistent over the coming years.

'If it turns out New Zealand is not successful in getting Covid under control and have to spend more time in lockdown then clearly that will have a greater negative impact for the economy.'

ASB expected a smaller decrease this year but a slower recovery.

Economist Tony Alexander said such predictions were difficult to make with any accuracy.

'I don't have a model to make my own forecasts and all these models can do currently is spit out numbers which reflect the assumptions put in. Change the assumptions and you change the predictions.

'I am advising businesses simply to restructure to a position where they can handle very low customer flows for an undefinable period of time. Then when the upturn comes be prepared to play catch-up for a while.

'That seems a safer strategy than trying to be clever and pick when the improvement comes. After all, no miracle has just happened to give them, the IMF, Treasury or anyone else an ability to predict outturns which clearly none of us possessed three months ago.'

The IMF said short-term contagion reduction measures should be seen as an important investment in long-term human and economic health.

'Fiscal measures will need to be scaled up if the stoppages to economic activity are persistent, or the pickup in activity as restrictions are lifted is too weak. Economies facing financing con­straints to combat the pandemic and its effects may require external support.

'Broad-based fiscal stimulus can preempt a steeper decline in confidence, lift aggregate demand, and avert an even deeper down­turn. But it would most likely be more effective once the outbreak fades and people are able to move about freely.

'Countries urgently need to work together to slow the spread of the virus and to develop a vaccine and therapies to counter the disease. Until such medical interventions become available, no country is safe from the pan­demic – including a recurrence after the initial wave subsides – as long as transmission occurs elsewhere.'