Economic Forecasts Improve

16/10/2020

The global economy continues to rise from the initial depths of the COVID-19 plunge, but the recovery period is sure to be fragile and full of uncertainty. While New Zealand is undeniably in an envious position by global standards, the national economy remains largely dependent on the world outside. New Zealand's economic prosperity relies on strong migration and population growth, with the tourism, education, and arts and recreation sectors all major contributors to the national economy.

In order to stay strong in the months and years ahead, New Zealand needs a virus-containment strategy that is coherent without ignoring the world outside. The tourism sector is hurting more than most, with overseas guests contributing $47 million per day to the national economy before the virus outbreak. While the domestic tourism market delivers an even bigger slice of the pie at $65 million per day, the complete lack of international visitors is having a huge effect on thousands of businesses across the country.    

Optimism is catching in some circles, however, with business and consumer confidence on the rise and the housing market leading from the front. According to ANZ chief economist Sharon Zollner in a new report, "We now see GDP bouncing back a little bit more strongly through the second half of this year... The unemployment rate is expected to rise a bit more slowly than previously assumed, with activity a little stronger, the wage subsidy delaying job losses, and effects of the closed border not evident just yet."

A number of recent reports highlight renewed confidence across New Zealand. The REINZ House Price Index increased by 11.1% in mid-October to a new high as record first-home buyers and investors enter the market. The ANZ Business Outlook Survey pointed to a steady improvement in confidence over the past two months, with obvious exceptions from tourism and related industries. ANZ now forecasts healthy 10% GDP growth for the September quarter, along with 2.5% growth for the December quarter. A long-term slump is still likely, however, with negative growth forecast for early 2021 and low growth expected as we head into 2022. 

ANZ is forecasting unemployment at 5.4% for the September quarter, although this is likely to rise in early 2021 and peak at 7.4% by late 2021. The outlook for the Reserve Bank is also slightly improved, with interest rates expected to drop further next year to support the economy as it attempts to cope with the long-term slump. While lack of migration and tourism numbers will affect the economy for a long time to come, domestic conditions are likely to stabilise as the economic outlook becomes more balanced but just as difficult to read.