ANZ warns economy may head south again from November

Friday, 31 July 2020

The economy looks set for further turbulence by November, ANZ warns.

ANZ says there is a risk of New Zealand dropping into a “double-dip” recession, with the economic mood likely to turn for the worse by November.

The bank was one of the first to detect signs of a stronger-than-expected recovery from coronavirus lockdowns in mid-May when it said New Zealand might be heading for “just a regular horrible recession”.

But it has now joined a growing chorus of voices questioning how long the recovery may last and worrying about a “W”-shaped downturn.

“While not our forecast, we think there is a material risk that the economy enters a double-dip recession,” ANZ economist Miles Workman said in a research note.

* Bounce in business confidence has 'run out of steam', ANZ warns

* Sir Bill English warns businesses to prepare for W-shaped downturn

“Economic indicators may remain on a ‘stable to improving’ trajectory into September, but our analysis suggests that by November at the latest the mood is likely to turn,” the warning said.

“By then, some temporary supports expire and the impacts of a closed border will become more acute.”

The assessment comes in the wake of a call by former prime minister Sir Bill English for businesses to prepare for the worst case scenario as “cracks” created by the economic earthquake of Covid-19 become more apparent.

The return in consumer confidence would not last and businesses are “reluctant to deal with the fact” that the economy might drop back again, English told a webinar hosted by accounting firm BDO on Thursday.

ANZ reported on Thursday that an improvement in business confidence appeared to stall late in July.

On Friday, it reported that an improvement in consumer confidence also appeared to have “run out of puff for now”, with its ANZ-Roy Morgan Consumer Confidence Index flat in July.

Reserve Bank deputy governor Geoff Bascand meanwhile indicated in a speech on Friday that the test of banks’ willingness to maintain lending through the Covid crisis was only in its early stages.

ANZ said in its research note it had warned a few weeks ago that the recession was just beginning “and this view hasn’t changed”.

“Just because New Zealand has come out of the gates sprinting, it doesn’t mean we can maintain that pace for the remaining 40-something kilometres.”

The release of pent-up consumer spending as consumers exited lockdowns had provided a short-term boost to the economy, but the brakes could come on as mortgage holidays and wage subsidies ended, it said.

There was normally a net loss of tourism dollars from New Zealand between May and September as Kiwis headed overseas for winter breaks and fewer international visitors arrived, it noted.

But the closed border meant the economy had been spared that phenomenon this year.

The real impact of closed borders would start to be felt strongly from October, which is when that trend would normally be reversed and was “not trivial”, it said.

The strong seasonality of tourism would push “some of the weakness” into the final quarter of this year and the first quarter of next year, it said.