The latest ASB Quarterly Economic Forecast is less gloomy than expected, with ASB chief economist Nick Tuffley saying Auckland's relatively rapid move from strict lockdown in March back to Alert Level 1 "limited the extent of near-term economic carnage."
The September report predicts the New Zealand economy will shrink 5% year-on-year by the end of 2020 - an improvement on the 6% decline predicted in the May report. It also takes a rosier view of the predicted unemployment rate, expecting a peak of 7.5% rather than the 9% predicted in May, and anticipates house price falls to be limited to around 3%.
Despite the earlier encouraging signs, Mr Tuffley says the August lockdown is estimated to have shaved 8% off New Zealand's weekly GDP and cost over $1 billion in lost economic activity, without taking into account the flow-on impacts of business failures, dented confidence and worsening health outcomes for those grappling with lockdown pressures or delayed healthcare treatment.
He notes that recent weeks are a timely reminder for all businesses to keep adapting their work from home practices so they can continue to operate as effectively as possible through a range of Alert Level restrictions.
The global economic fallout of COVID-19 is increasingly evident. Mr Tuffley says the economic toll is "immense" regardless of whether the hard or soft lockdown approach has been adopted and "massive losses of income are being papered over by huge amounts of government borrowing and central bank policy stimulus."
"Until COVID-19 is brought under control, economic activity will face periods of disruption. An effective vaccine to combat the outbreak could still be years away and until then, containment looks to be the best solution. The art will be refining and adapting restrictions and business operations to minimise disruptions.
"Demand for New Zealand's key export goods are tied to the fortunes of our key trading partners; China's rebound is encouraging and should help underpin prices for food exporters. In fact New Zealand's export sector is proving a pocket of strength, with fruit exports performing particularly well, and meat and dairy prices recovering from earlier declines.
Mr Tuffley says, "China has weathered the pandemic relatively well and is likely to remain a source of support for some of New Zealand's commodity exports. We expect our food-related export earnings to cushion the impact of weaker global economic demand on the broader New Zealand export sector."
Across the ditch the prolonged Victoria shutdown has slowed Australia's recovery, but it's still on track to limit its 2020 GDP fall to around 4%, similar to New Zealand's outlook.
Economists were surprised at how quickly and strongly economic activity returned following the first lockdown, however, the period of tighter COVID-19 alert levels in August is expected to take up to 8% off weekly NZ GDP and 0.5% off annual GDP.
"While the local economy has proven to be more resilient than expected over 2020, we remain relatively cautious about the pace of growth over 2021 and 2022. In our view, it will be 2023 before the New Zealand and global economies properly enter 'recovery mode' and allow for above-average rates of GDP growth."
"In terms of interest rates, we now expect the RBNZ to cut the OCR by 75bps, to -0.50%, in April 2021. Our change in view is due to the RBNZ's apparent willingness to move the OCR lower after its current forward guidance expires, along with our conviction that current monetary settings do not offer enough economic support. We have pencilled in the first RBNZ rate hike for early 2023, but admit the timing is highly uncertain."
The latest ASB Quarterly Economic Forecast will be available online at https://www.asb.co.nz/documents/economic-research/quarterly-economic-forecasts.html
Other recent ASB reports covering a range of commentary can be accessed at our ASB Economic Insights page: https://www.asb.co.nz/documents/economic-insights.html