BNZ: Australia will bounce back from Covid-19 faster than NZ will

Monday, 25 May 2020

Australia’s economy is likely to come through the Covid-19 disruption in a better state than New Zealand’s – but that doesn’t mean we should leap to heap blame on the Government for its response, BNZ economists say.

In a market update released on Monday, the bank’s economists compared their forecasts for the local market with those that parent company NAB had produced for Australia.

The initial blow to gross domestic product (GDP) from Covid-19 seemed bigger in New Zealand than Australia, they said.

“The peak-to-trough decline in activity here is expected to be around double that of our neighbours. This is largely a direct reflection of extremity of the lockdown New Zealand faced.

* ASB warns no certainty as to shape of recovery

* 'Curve flattening' and lockdown must succeed to make economic price worthwhile: ASB

“By New Zealand Treasury’s estimates, 39 per cent of the economy was shut down during our period in level 4 lockdown. This diminishes to 24 per cent as we moved into level 3. It’s really difficult to compare lockdowns across jurisdictions but it seems to us that Australia never had a level 4.”

The economists said, at their toughest, the Australian restrictions might have reached a level 3.

“If New Zealand had sat at level 3 for the whole time it had been at level 4, this would explain roughly half the difference between the short-term performance of the two economies.”

But they said that did not mean that New Zealand had taken the wrong approach.

“Decisions were made for the ‘right’ reasons. For now, at least, Covid-19 has been effectively eliminated. We will soon, hopefully, witness the benefits of operating in a domestic economy with few restrictions, and we will never know what the counterfactual would have been had we not taken the approach we did.”

The report said New Zealand would take longer to get back to 'normal' than Australia because of the extent of our lockdown.

“Irretrievable losses associated with a major shutdown spell the end to more businesses than a more modest approach would have. And, ironically, the very thing that protected the New Zealand economy from an even bigger correction, will also delay the timing of a recovery - that’s the wage subsidy.'

Australia's did not become available until May whereas New Zealand's were handed out from March,

“In order to receive payment, businesses had to guarantee employees would be kept in employment for the full 12 weeks and receive no less than 80 per cent of their normal remuneration.

“While this will ultimately mean more people will probably be kept in employment than would otherwise have been the case, it also means the inevitable increase in the unemployment rate will be delayed relative to the increase in Australia. According to NAB forecasts, Australia’s unemployment rate rises from 5.1 per cent in Q4 2019 to 11.7 per cent two quarters later, an increase of 6.6 per cent.

“In contrast, we forecast New Zealand going from 4 per cent to 6.3 per cent, an increase of 2.3 per cent over the same period. But then the wage subsidy expires to be replaced with another more moderate subsidy which, in turn, will expire in the September quarter. Consequently, New Zealand’s unemployment rate ends up peaking at around 10 per cent in the December quarter. The total increase of 6 per cent is similar to Australia’s.”

That delayed employment impact would slow pick-up in other activity through next year and 2022.

Both countries were reliant on external demand, BNZ’s economists said, and tourism specifically. New Zealand exports are 30 per cent of GDP. In Australia, it is about 22 per cent.

Tourism is about 20 per cent of New Zealand total exports, or 6 per cent of GDP, versus 9.5 per cent in Australia, or less than 2 per cent of GDP.

“International tourism is likely to be the last cab off the rank in the global recovery and the cab may be even later arriving in Australasia if we maintain tighter border control than most in a bid to keep Covid-19 at bay for longer. On the plus side, an opening of the borders with Australia would have a significant positive impact on New Zealand – an impact that is currently not included in our central forecast scenario.”

New Zealand's drought would also hamper recovery. 'Had it not been for the current shock, it is likely the number one topic for the investor and business community right now would be trying to determine whether the drought would, or would not, throw New Zealand into recession.'