Prepare for another recession in 2021: Infometrics

Thursday, 15 October 2020

Infometrics economists talk about the housing market.

New Zealanders should expect another recession next year, Infometrics is warning.

The economics consultancy has released its latest forecasts, which show that even though the country has rebounded well from the March lockdown, the economy is vulnerable and there are more bumps to come.

Chief forecaster Gareth Kiernan said there would be three quarters of falling GDP in 2021, after positive growth in the September and December quarters this year.

“The next few months will be crunch time for the New Zealand economy,” he said.

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The country bounced back from the March lockdown, but things will get tougher next year, Infometrics says.

“The loss of international visitors will be keenly felt by tourism operators during the normally busy summer month, while retailers will also be hoping that spending momentum continues into Christmas. Other businesses are also likely to reassess their staffing requirements heading into the new year if there is any softness in demand conditions.”

Infometrics expects a decline in employment of 186,000 jobs by June 2021 compared with pre-pandemic levels. It predicts an unemployment peak of 8.8 per cent in March, up from 4 per cent. That would lead to a contraction of more than 3 per cent in consumer spending and GDP in the first nine months of 2021.

The outlook is better than initially feared - at one point it had been expected there would be more than 300,000 job losses. There was a chance that unemployment would not get beyond 8 per cent, he said.

Kiernan said the wage subsidy scheme and other support could be viewed as successfully mitigating the effects of the pandemic response on the economy and job numbers.

He said the effect of the downturn would continue to be felt unevenly across the country, “particularly in the near term when tourism-dependent areas still look most vulnerable”.

“Although the effects are likely to become more diffuse as time rolls on, the drop in employment and associated downturn in the likes of Queenstown-Lakes and Mackenzie will still be larger than in areas that are more based around agriculture or other parts of the services sector.”

Kiernan said the housing market had so far been unscathed by the pandemic.

Demand for housing had been buoyed by a spike in returning New Zealanders and record low interest rates. Infometrics expects house price growth to slow during 2021, but no longer expects prices to fall. Previously predictions had been for a fall of up to 15 pe cent.

“Renewed house price rises have been a side-effect of the Reserve Bank’s efforts to stimulate the economy,” Kiernan said. “Job losses to date have been concentrated among segments of the population that are less likely to be homeowners. The ongoing surge in house prices is exacerbating the uneven effects of Covid-19 and amplifying inequality issues within New Zealand.

“The economy has been regaining momentum, and the question now is if we can sustain this path ahead. Risks remain to our outlook, particularly due to the precarious position of the global economy, but our domestic performance means we’ve weathered the immediate storm as well as could be expected.”