The Economic Realty of Lockdown 2.0

10/08/2020

According to modelling from Westpac based on different lockdown scenarios, we are likely to see further declines in national growth due to the size and scope of possible lockdowns. If Auckland remains at level 3, with the rest of the country at level 2, there is likely to be a 6% drop in GDP. If the entire country enters level 3, a 12% drop in GDP has been suggested. Somewhat surprisingly, however, the worst case scenario will take place if Auckland goes to level 4 but the rest of the county stays at level 2, in which case a 15% drop in GDP can be expected.

In real money terms, we will see hundreds of millions of dollars wiped from economic activity each and every week. According to Westpac's Chief economist Dominick Stephens, the current lockdown settings would remove $300 million of activity from the economy on a weekly basis. ASB’s economists are even more pessimistic, with a $450 million weekly decline suggested even with a relatively short lockdown period. According to ASB senior economist Mark Smith, “Hopefully, the economic hit from this latest outbreak will prove short-lived, but the short answer at present is that we really don’t know."

As the nation's economic powerhouse, what happens in Auckland in coming weeks will have a huge effect on the national economy.

Around 250,000? Auckland workers are unable to operate under alert level 3, which will put a significant dent on growth. Current ASB estimates see 0.2% being wiped from national growth every week, with a move to level 3 nationwide likely to see cuts of 0.3%, and the possibility of alert level 4 seeing 0.5%. While some of these scenarios are unlikely at this stage, they highlight the very real impact of the current course.

According to Mr Stephens, however, the economic downturn from a possible second wave is likely to be somewhat muted compared to the initial lockdown: “There certainly was substantial economic damage from the first lockdown and there will be from a second but much less than we feared. Predictions did not pan out. There were fewer business failures than expected and substantially less unemployed. Most, though not all, of the lasting damage to trading activity has been in travel and tourism – you can’t lose the tourism sector twice.”

Despite the pain they cause, widespread lockdowns are still the best course of action according to Mr Stephens: “If New Zealand loses control of the virus, that would be a game changer for the economy. Around the world, we are seeing a sharp divergence in the economic performance of countries that have control of the virus, compared to countries that do not. Countries that have implemented successful lockdowns are generally doing much better economically than countries that have not – illustrating that the ‘choice’ between ‘health and economy’ was always a false dichotomy.”