'Hard and early' lockdown was the right economic strategy: Economist

Thursday, 4 February 2021

Displaced workers who have lost their jobs during Covid-19 are being offered free study to retrain for jobs in the agriculture industry.

Going “hard and early” with a strict lockdown to stop the spread of Covid-19 has proved to have been the best tactic for the economy, too, Infometrics chief forecaster Gareth Kiernan says.

The economics consultancy has updated its forecasts and now expects GDP growth to accelerate to 4.6 per cent in the second half of 2021. Kiernan said the country’s economy had now almost recovered to pre-Covid levels. In the year to December 2019, GDP growth was 2.3 per cent.

Kiernan said the massive fiscal and monetary stimulus put in place last year, combined with the country’s good public health outcomes, limited the number of job losses, boosted the housing market and construction activity, and underpinned a strong rebound in economic activity after lockdown.

NZ’s approach to the coronavirus pandemic is being lauded.

“The labour market’s performance is nothing short of remarkable,” he said.

“This week’s data, showing the unemployment rate falling to 4.9 per cent and job numbers down just 9000 from their pre-Covid level, underpins a robust financial position for most households. Prospects for solid spending this year will feed through into increased optimism among businesses about their future activity levels.”

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A strict lockdown turned out to be the best for the economy too, Infometrics says.

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Spending has been strong since lockdown. In December, retail spending was up 3.5 per cent compared to a year earlier, according to Stats NZ’s electronic card transaction data.

Kiernan said, compared to the experience of countries such as Britain, which did not lock down as hard or early, the Government’s assertion seemed fair that its shorter, sharper restrictions were the best option for the economy as well as public health.

It had produced a much better result than seen in countries that had shifted in and out of lockdown, he said.

There had also been some luck involved in the virus not spreading further into the community when it had made it past the border.

Kiernan said, provided there was not another outbreak in New Zealand, the country was through the worst of the Covid-19 disruption, although there was still the potential for more job losses in retail and tourism. There had not been the “spillover” to other industries that had been expected last March and April, when job losses seemed to be spreading widely.

“That does reflect the sheer amount of stimulus that was being thrown at businesses.”

With the wage subsidy, and other support, many firms had ended up in a good cashflow position, he said.

Kiernan said, with the benefit of hindsight, the Government could have opted for a less generous wage subsidy scheme. “But I’m not going to be critical of the way it was implement at the time. It had to be done in a hurry. If it was too much, so be it.”

Kiernan said one of the key factors behind the improved growth outlook was the “rampant” housing market and the effect that had on construction activity.

The reintroduction of loan-to-value restrictions was likely to drag house price inflation back into single digits by the end of this year, from an annual rate of nearly 20 per cent.

But Infometrics forecast that house prices would rise through the next 24 months. Further interest rate cuts and any other monetary stimulus were off the table, Kiernan said. Even a few months ago, economists were predicting the official cash rate could slip below zero by April.

But the combination of an improved economic outlook and soaring house prices would intensify pressure to address the housing crisis, Kiernan said, and the government would need to take action to ensure equitable housing outcomes.

Kiernan said medium-term growth prospects for New Zealand were more challenging, with average GDP growth predicted to be below 2 per cent a year in the mid-2020s. “International tourism is unlikely to fully recover within the next four years, and the overvalued housing market could also weigh on construction activity and economic growth further out,” Kiernan said.

“There will also be a need for significant fiscal restraint following last year’s spend-up. But New Zealand’s current prospects are astounding compared with projections from nine months ago, as well as being enviable in the context of the ongoing international battle with Covid-19.”