Govt books show NZ's economy has long slog ahead to shake off Covid, economists say

Wednesday, 16 September 2020

Grant Robertson speaks as the government unveils its official economic forecast.

New Zealand’s economy faces a long, slow grind to recover from Covid-19, Government accounts released on Wednesday show.

Economists say the pre-election fiscal update highlights that while the initial impact will be shallower than was expected when the pandemic first hit New Zealand, its effect will be felt much longer.

Government debt is expected to climb to 55.3 per cent of gross domestic product (GDP) by 2024. Treasury's May statistics had pegged unemployment to rise to 9.8 per cent this year but it now thinks the unemployment rate will peak at 7.8 per cent and will remain higher for longer.

While officials had expected nominal GDP to rise to $437 billion by 2024, Treasury now says it will be $10b less at that point.

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Brad Olsen, an economist at Infometrics, said the global economy had taken a swifter hit than was expected and the structural economic changes that had to happen locally would take longer than initially thought.

Grant Robertson has unveiled Treasury predictions for a milder short-term hit but a long Covid hangover.

The economy was now not expected to return to pre-Covid levels of activity until the end of 2022.

Unemployment was set to remain above 6 per cent until the end of 2023, according to Treasury estimates.

“Kiwis are going to find it difficult for an extended period to find a new role,” he said. “The unemployment rate will be higher and more people will be out there looking for jobs.”

That would be felt most keenly in tourism-related sectors, he said, but there was a ripple effect to other sectors.

“People looking for work will be from a range of sectors competing for a relatively smaller number of roles.”

It would probably drive more people to upskill or reskill to make themselves more appealing to employers, Olsen said.

“What we will continue to see is the hit from the pandemic spread over a longer time.”

Christina Leung, principal economist at NZIER, said the second wave of community transmission detected in August had introduced more uncertainty and would lead to a slower economy over the longer term if households and businesses put off investing and spending.

“Activity following the first lockdown has been stronger than initially expected, largely reflecting the effects of the huge amount of stimulus from the Government and Reserve Bank in supporting demand.

“However, the risk of the economy having to move in and out of alert levels to contain any re-emergence of Covid-19 is expected to continue to weigh on activity over the longer term. This will mean a more drawn out recovery over the coming years.”

Westpac economist Michael Gordon said Treasury was still being too pessimistic about the longer-term outlook for New Zealand.

“The Treasury has revised its estimate of the June quarter decline in GDP from minus 23.5 per cent to minus 16 per cent – still weaker than market forecasts, which have benefited from additional data that was published in the last couple of weeks. And the Treasury has revised up its forecast for the level of GDP for the immediate post-lockdown period.

“While the outlook for the year ahead is firmer, the Treasury now expects a less vigorous rebound in the following years, with the level of GDP remaining even lower than in its Budget forecasts. This reflects a view that the effects of the pandemic will be more persistent, both here and globally.”

Economist Shamubeel Eaqub agreed the initial impact was not as deep as many had expected, largely due to the impact of the wage subsidy scheme and other stimulus on the economy.

But the ongoing reverberations were driven by the pandemic’s effect on imports and global trade.

“That long slog is where we are at.”

He said the long, slow grind to recovery would create pressure for the next Government. It would be hard to talk about higher taxes or paying down government debt in an environment where people were still struggling for work. People would notice areas where a Government should be spending but it would be constrained in what it could do.

Other countries were in a similar position, he said. “People are settling in for a few years of tough economic times. But to me it still feels like we are doing a hell of a lot better than we thought we would.”