Economy will still be almost 9% under power during level 2, Reserve Bank says

Wednesday, 6 May 2020

Economic activity will be suppressed by almost 9 per cent by coronavirus restrictions even once the Government moves the country down to alert level 2, the Reserve Bank has forecast.

The central bank estimates economic activity fell by 37 per cent during the level 4 lockdown and is currently down 19 per cent during level 3.

The hit to the economy would fall to 8.8 per cent at level 2, and then down to 3.8 per cent at level 1, it estimates.

The big change that money finance would bring would be to the independence of the Reserve Bank.

But the impact of the coronavirus restrictions would be very uneven, with the tourism industry slammed and the Government sector relatively unscathed, it forecast.

The continued near-annihilation of international tourism at level 2 would result in a 4 per cent drop in activity, while a forecast 75 per cent decline in domestic tourism and travel would deliver a 4.5 per cent hit.

The Reserve Bank estimated which economic sectors fared best under alert level 4 lockdown.

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The remaining 0.3 per cent decline due to level 2 would be as a result of continued restrictions on mass gathering and public events.

'We estimate GDP was around 37 per cent lower during the period of alert level 4 than it would have been without any restrictions,' the Reserve Bank said in the paper released on Wednesday.

'Over four and a half weeks that equates to $10 billion of lost production, reducing annual GDP by 3.2 per cent,' it said.

A similar period of time at alert level 3 would equate to a fall of abound $5b in production relative to the same baseline, reducing annual GDP by 1.7 per cent, the Reserve Bank said.

A lot more business could be done under alert level 2, but economic activity would still be 8.8 per cent lower than normal, it estimated.

The least impacted sector of the economy from the fight against Covid-19 was government, which under alert level 4 ran at 90 per cent normal capacity.

Utility providers such as power companies and telecommunications operations, and the primary sector including dairy farming, also got off relatively lightly it believes.

The 'worst' two sectors covered by the central bank's analysis were the accommodation and food industry, which ran at 11 per cent capacity at level 4, and the construction sector, which ran at 19 per cent.

'Production in all industries has been affected in some way compared with pre Covid-19 levels,' the Reserve Bank said.

A bumper kiwifruit harvest has helped keep New Zealand's balance of trade firmly in the black.

Economic activity increased significantly when the country moved from level 4 to level 3.

'We estimate GDP will be 19 per cent lower during alert level 3 compared with no restrictions. However, the impact on firms is highly uncertain during this period,' its analysis said.

'While non-essential businesses are able to open, a number of restrictions remain in place around social distancing. This limits firms’ activity, particularly for those that are reliant on face-to-face contact with customers.

'As seen in level 4, the guidelines are likely to be refined further as the consequences of the restrictions are better understood.'

The analysis indicated during alert level 4, the Māori economy experienced a drop of 38 per cent, and was also being worse hit than the wider economy under level 3.

That was partly because of the importance of tourism to the Māori economy.

The economy would take a long-term hit to economic growth by the closure of the borders.

Under alert level 2 international tourism income would be at 5 per cent of normal, with the only spending being by the few international tourists trapped in the country.

Restrictions on mass gatherings would continue to impact sports and entertainment operations, reducing 'production' in those sectors by about half.

Domestic tourism will remain 75 per cent below normal under level 2, the Reserve Bank estimates.

'A reduced number of immigrants would result in long term consequences for the NZ economy, with a cumulative impact on GDP while border restrictions remained in place,' it said.

Closing the border to immigrants for three months would reduce GDP by 0.25 per cent while closing it for a year would reduce GDP by 1 per cent, it said.

The estimates suggest a slightly smaller impact on the economy of operating under alert levels 4, 3, 2 and 1 than estimates provided by the Treasury in April.

But the analysis was in the 'same ballpark' as earlier OECD estimates, the Reserve Bank said.

In a positive development for the economy, Statistics NZ reported that New Zealand's exports rose 3.3 per cent to $1.18 billion during the week to April 29, from the same week a year ago.

That was despite the country being in level 4 lockdown for most of that week.

Imports fell 28 per cent to $834m.

The figures are preliminary but match previous releases from Statistics NZ that suggest strong agricultural exports and prices, boosted by a bumper kiwifruit harvest, are helping to keep the country's trade figures healthy.

Statistics NZ also released unemployment figures that show the labour market was in good shape prior to the level 4 lockdown.

Seasonally-adjusted unemployment rose to 4.2 per cent at the end of March, up from 4 per cent at the end of December.

ANZ said those figures painted a positive picture, but had been overtaken by events.

'The reality is that lives and livelihoods are being significantly affected by the Covid-19 crisis, and the labour market is deteriorating,' it said.