New Zealand’s successful public health response to the COVID-19 pandemic should not be taken to mean our economic struggles are over, according to Infometrics’ latest forecasts. Given that life has largely returned to “normal” at Alert Level 1, economic outcomes in the near-term will be better than initially feared. However, the full effects of the border closures, business failures, and job losses will only become apparent over the next 18 months.
“The government’s wage subsidy scheme was an appropriate immediate response to the pandemic, shoring up businesses’ cashflow through a period of restricted activity,” says Infometrics Chief Forecaster Gareth Kiernan. “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 8.0% by the end of this year and peak at 9.7% during 2021.”
The ongoing and worsening pandemic internationally also raises questions about global growth and its effect on New Zealand’s other exports. Infometrics sees further downside risks emerging for the world economy given the second wave of COVID-19 infections being experienced by some countries and the ongoing increase in international case numbers. New Zealand’s agricultural base suggests demand for our exports should hold up reasonably well, but prices are still likely to be dampened by difficult economic conditions overseas.
Despite these concerns, there are some brighter spots in Infometrics’ latest forecasts. The continual stream of Kiwis returning from overseas will help the housing market sidestep the worst of its predicted downturn, with house prices set to fall 6%, rather than 11%, by the end of next year. Tourism-related businesses are being buoyed by our keenness to holiday domestically, and this freedom and willingness to travel is likely to prevent job losses being as catastrophic as initially expected. Many partial indicators of activity have also bounced back to pre-COVID levels, suggesting that a significant chunk of the economy has 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,” says Mr Kiernan. “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% 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.”