Covid 19 coronavirus: the economy continues to exceed expectations – ASB

The second Covid-19 outbreak hasn’t stopped the economy from exceeding May expectations, ASB economists say.

In its latest quarterly outlook, ASB has revised up its GDP and unemployment forecasts.

“Our forecasts for New Zealand seem better now than in May, “said ASB chief economist Nick Tuffley.

“We expect the economy to contract by around 5 percent when comparing the end of 2020 to the end of 2019, an improvement from the 6 percent decline we had anticipated in May.”

The strength of the rebound after the first national block managed to overcome the impact of the Auckland blockade in August.

ASB estimates that the August lockdown could take away as much as 8 percent of New Zealand’s weekly GDP, and overall, the August outbreak is likely to reduce around 0.5 percent of annual GDP.

“Now that New Zealand is more cautious about the possibility of future outbreaks, we expect a more cautious attitude from consumers and businesses in the future,” Tuffley said.

“However, our forecasts for economic growth remain more robust compared to our forecast finalized in May. We now expect the unemployment rate to peak at 7.5%, compared to 9% in May.

That was due in part to the quick return to alert level 1, but also to extensions of the wage subsidy, he said.

ASB also sees the housing market to remain stronger than expected, it is now forecast to fall 3 percent compared to a previous forecast of 6 percent.

“People’s behaviors are changing and interest rates are getting lower and lower, and they will continue if the RBNZ really lowers OCR to a negative rate as we now expect,” Tuffley said.

Another point of strength has been the New Zealand export sector.

The terms of trade and export prices of New Zealand goods reached record levels in the June quarter.

In particular, fruit exports had performed well and meat and dairy prices had picked up some of the declines seen earlier in the year, Tuffley said.

“China has weathered the pandemic relatively well and is likely to continue to be a source of support for some of New Zealand’s commodity exports,” he said.

“We expect New Zealand’s food-related export earnings to cushion the impact of weaker global economic demand on New Zealand’s export sector overall.”

New Zealand’s main political parties have committed to continuing the Covid-19 elimination strategy, Tuffley noted.

That meant the likelihood of New Zealand’s borders opening on a large scale was lacking.

“In the meantime, New Zealand needs to work on ways to fill the estimated 5 percent of GDP gap that has been created by the closure of our borders (and reduced appetite for travel globally),” he said.

“New Zealand’s economy and society are irrevocably in flux as a result of the pandemic and we must adapt to the new reality.”

The phase-out strategy also meant “doing everything possible to ensure that its implementation is as effective as possible and takes into account the economic cost it is incurring.”

Despite the relative resilience of the economy, ASB maintained a cautious growth outlook through 2021 and 2022.

“Throughout 2021, the realities of the weaker job market are likely to catch up with consumers, affecting the appetite for spending, and many businesses may remain reluctant to invest as the uncertainty of the pandemic continues to weigh on,” he said Tuffley.

“Even once a vaccine is developed, it will take some time before it can be manufactured and distributed in quantities that will materially relax border restrictions.”

“In our opinion, it will be 2023 before New Zealand and the world economies enter properly
recovery mode and allow higher than average GDP growth rates. “