Early moves out of lockdown and unexpectedly high economic activity have helped the economy to beat pessimistic forecasts from earlier in 2020 – but the clouds on the horizon appear darker than first expected
New Zealand’s economy has performed better than expected in the immediate aftermath of the Covid-19 lockdown, new Treasury figures show – but the longer-term pain ahead is set to be greater than anticipated as the world slowly recovers from the pandemic.
Finance Minister Grant Robertson has claimed the numbers as a vindication of the Government’s ‘go hard and early’ response to the virus, while acknowledging “there is no free lunch here” regarding the debt being accrued.
The Treasury has released its Pre-election Economic and Fiscal Update (PREFU) ahead of the October 17 election, giving both politicians and the wider public a better idea of the state of the Government’s books.
The Government has posted an OBEGAL deficit of $23.4 billion for 2019/20, a figure expected to worsen to $31.7b in 2020/21 before beginning to recover.
Longer-term projections suggest the Government will continue to record deficits through to 2033/34.
Treasury Secretary Caralee McLiesh said the PREFU forecasts were overall less negative for the near term than had been predicted in the Budget update.
A forecast 16 percent decline on GDP for the June quarter would be the sharpest on record, but still lower than the 24 percent drop forecast in the Budget, with the economy benefiting from an earlier than expected lifting of alert levels, as well as economic activity at the various levels exceeding predictions.
McLiesh said the unemployment rate was expected to peak at 7.8 percent in the March 2022 quarter, both lower and later than had been predicted in the Budget (which had forecast a peak of 9.8 percent in September 2020).
However, the longer-term growth forecasts had deteriorated due to a less positive global economic outlook, while the impact of Covid-19 on unemployment was expected to be more persistent than estimated.
The economic activity of New Zealand’s top 16 trading partners was expected to drop by 3.3 percent across 2020, before rebounding 5.5 percent in 2021.
McLiesh said the Treasury’s projections “continue to be characterised by profound uncertainty”, with the figures guided by assumptions around New Zealand’s alert levels and their effect on economic activity, as well as the length of border closures.
The forecasts also assumed the $14.1b of unused funding in the Government’s Covid-19 Response and Recovery Fund would be allocated by the end of 2023/24.
Robertson said uncertainty was a commodity in abundance around the world, as nations tried to figure out how best to deal with the unprecedented impact of the virus.
“There is no playbook: the good news is that we as a country are looking better right now than most others. The bad news is that all of us around the world are still understanding the full impact of Covid-19.”
Moving “swiftly and compassionately” to provide fiscal support like the wage subsidy scheme had helped to reduce the impact of Covid-19 on Kiwis, he said.
Robertson said the Government would not dip into the $14b of unallocated Covid spending unless absolutely necessary, leaving as much as possible in reserve for the “unhappy and unlikely scenario” of a resurgence of the virus.
He highlighted the Government’s infrastructure investments, estimated to total $42b over the next four years, saying spending on infrastructure and other critical public services would be essential to the country’s recovery.
Robertson attacks National’s ‘Bermuda triangle’ fiscal plan
The Labour MP also slipped in an attack against the National Party’s fiscal plans, saying it would need to explain how it could achieve a “Bermuda triangle” fiscal approach of simultaneously increasing spending, dealing with reduced revenue, and cutting debt levels.
The PREFU says Treasury’s forecasts are based on an assumption that limited international travel will resume in mid-2021, either through travel bubbles or reopening to international students, with the border restrictions lifted in full at the start of 2022.
Robertson said that was not based on any government policy, and the Government was hopeful that it could move faster than forecast to open the borders to specific sectors or countries.
However, one of the more pessimistic alternative scenarios modelled by Treasury considers the effect of indefinite border controls if no form of effective treatment is found, leading to weaker global economic growth and lower export returns, resulting in “increased business failure, weaker investment and persistently higher unemployment as the structure of the economy changes”.
A more positive alternative scenario, based on the development of policies and procedures that reduced the risks to public health associated with international travel, would lead to an earlier recovery in services exports, stronger levels of business investment, and a lower unemployment rate.
Happily for homeowners, although less so for the thousands of Kiwis shut out of the housing market, it seems house prices have an immunity to Covid-19 – Treasury has forecast a rise of 17 percent over the four-year period to 2023/24.
