Wage subsidy 'expensive exercise in delaying job losses'

Thursday, 23 July 2020

Some parts of the economy are basically back to normal but don’t let that fool you, Infometrics says.

New Zealanders should not be fooled into thinking that the worst of the Covid-19 economic pain is behind them, Infometrics economists say.

They have released their latest forecasts, which show the full economic effects of the pandemic on Ne Zealand’s economy may only be fully felt next year.

Chief forecaster Gareth Kiernan said the country’s successful public health response should not be taken to mean the economic struggle was over.

Given that life has largely returned to “normal” at alert level 1, economic outcomes in the near-term would be better than initially feared, he said.

But there would still be business failures and job losses to come.

* Jobseeker numbers topped 201,000 in June, and more job-losses expected

The Government has paid out $11 billion in wage subsidies to businesses that have suffered a loss of income as a result of the coronavirus crisis. (File video, first published in August 2020)

* More than 200,000 New Zealanders now on unemployment benefits

“The Government’s wage subsidy scheme was an appropriate immediate response to the pandemic, shoring up businesses’ cashflow through a period of restricted activity,” Kiernan said.

“However, the scheme is now simply an expensive exercise in delaying inevitable job losses. For the tourism sector, it is clear that the borders will not open again by September when the scheme ends.

“We expect to see further substantial job losses as various support mechanisms end later in 2020, and we forecast the unemployment rate will climb above 8 per cent by the end of this year and peak at 9.7 per cent during 2021.”

There are now 208,577 New Zealanders on either Jobseeker Support or the Covid-19 payment. More than 63,000 people have signed up since March 20.

Kiernan said the global effects of the pandemic raised questions about the economy more widely and exports.

A second wave of Covid-19 in some countries increased the risk of a bigger global downturn than expected.

He said New Zealand’s agricultural exports should hold up well but prices could fall.

But the flow of returning New Zealanders would shore up the housing market, Kiernan said.

Infometrics now expects house prices to fall 6 per cent rather than 11 per cent as had initially been predicted, by the end of next year.

Tourism-related businesses were buoyed by New Zealanders’ keenness to holiday domestically, and this freedom and willingness to travel was likely to prevent job losses being as catastrophic as initially expected, Kiernan said.

Many partial indicators of activity had also bounced back to pre-Covid levels, suggesting that a significant chunk of the economy had largely shrugged off the effects of the pandemic for now.

“It’s important to realise that, even with these positives, there is a lot of economic hardship still to work through,” Kiernan said.

“Crunch time will be late this year once the government’s wage subsidy and mortgage holiday schemes end. We forecast New Zealand’s GDP to still be 4.8 per cent smaller than its pre-Covid size by the end of next year, and that GDP will not surpass its 2019 level until 2023. This recovery will be much more of a long, hard slog than general sentiment currently suggests.”