Standard & Poor's sees 'bridge to recovery' in New Zealand

Wednesday, 3 June 2020

Some people who lost jobs during the Covid-19 lockdown haven't found themselves out of work for long.

New Zealand could avoid a very damaging rise in unemployment according to an upbeat assessment by economists at credit ratings agency Standard & Poor's.

S&P's chief economist for the Asia-Pacific, Shaun Roache, said it expected unemployment in New Zealand to average 6.2 per cent this year and 5.6 per cent next year.

It forecast GDP would fall 5 per cent this year before bouncing back 6 per cent in 2021, which Roache said was probably a bit more optimistic than the consensus among analysts.

S&P is currently forecasting a 6 per cent fall in GDP in the US this year, a 7 per cent drop in Europe and 1 per cent growth in China.

* That light isn't the one at the end of the tunnel, bank economists warn

S&P's forecasts assume a medical solution to Covid-19 is available by the end of next year.

* Coronavirus: Treasury unemployment forecast unrealistically rosy, economists say

'The broad story globally is the virus appears to have been initially contained and in all the major economies we are starting to see an opening up,' Roache said.

S&P saw a recovery starting before the end of June, 'gathering stream' by October and picking up further momentum in 2021, he said.

That was based on its assumption that a 'lasting medical solution' to Covid-19 would be found and made available before the end of 2021.

'That is the underlying assumption we use for all our global growth forecasts right now,' he said.

Westpac is one of many banks to have upgraded their outlooks in recent days.

A 'V-shaped recovery' appears to have been almost achieved on Wall Street, despite the continued spread of the coronavirus globally and civil unrest in the United States.

The technology-rich Nasdaq index closed on Wednesday just 2 per cent down on its record high in February, with the S&P 500 index also now less than 10 per cent under its February peak.

Michael McCathy, chief market strategist at CMC Markets in Sydney, said analysts at major banks were 'capitulating on their bearish outlooks'.

He described the current sentiment as 'optimism rules'.

The mood in New Zealand began to lift off a low in mid-May, around the time that ANZ chief economist Sharon Zollner said the country might get away with just a 'regular horrible recession' rather than something unprecedented.

The New Zealand Institute of Economic Research has since forecast that unemployment could peak in New Zealand at 'only' just over 8 per cent, and not until 2022.

Westpac said in an update on Tuesday that it looked like unemployment might not rise 'quite as high' as its forecast of 9.5 per cent.

Reserve Bank governor Adrian Orr warned a select committee when discussing a financial stability report last week that much depended on how high and how persistent unemployment was.

S&P's Roache said New Zealand's $11 billion wage subsidy programme could work and help contain a rise in jobless numbers.

'We think the policies we are seeing in New Zealand and Europe … are quite positive in terms of creating a bridge to the recovery that should start to pick up steam later this year if the virus remains contained.'

But if S&P was wrong and unemployment were to average 8 per cent over a year, not only would the immediate damage be greater but it would also take 'much longer' to get back to a pre-Covid growth trend, he said.

'When jobs are lost they are very hard to regain.'