Unbearable! Australia Out In Front
There’s a lot of discussion about the relative economic performance of New Zealand and Australia. So far, most economic indicators we look at suggest Australia is going to come through the current shock in a better state than ourselves. We have little reason to question that conclusion. However, we are less inclined than some to put the “blame” for this on the decisions of policymakers.
April’s Plunge from Q1 Cliff
With last week’s Monetary Policy Statement and Budget all said and done, this week’s focus will return fairly and squarely on the economic data. Friday’s retail trade report might take a bite out of thoughts of a steady Q1 GDP. And, the range of data for April will hammer home the maximum lockdown that the country went into that month.
Level Shift No Cure All
Moving through the levels is cause for hope. But we caution there is a very long way to go yet. Partial indicators are now starting to reveal the full impact of the economic slowdown and we fear that even a move to Level 2 will not provide the boost the economy so badly needs. Thursday’s Budget will shed light on the Government’s next steps while the RBNZ should confirm its intent to fund those same steps in its May MPS.
MPS Preview – RBNZ Can’t Save The World
In our opinion, the most appropriate way of approaching the cash rate in the current environment would be for the RBNZ to flat-line, at 0.25%, its OCR track for an extended period. More stimulus can, and will, be provided via a further expansion of the central bank’s balance sheet to cater for the ongoing increase in funding demands by government.
Growth lower for longer
Moving to Level 3 signals the beginning of the recovery but there’s a very long way to go. One of the factors that will constrain the medium-term expansion is much lower population growth. We think the impact of this is being underestimated by many. At the same time, we think the risk of the RBNZ pushing its cash rate into negative territory is being overestimated.
A Small Step In The Right Direction
New Zealand has reduced its Covid-19 containment status to Level 3 from Level 4 but this will not happen until April 27, almost a week later than many had hoped. This will potentially enable around 500,000 people to return to work and increase the amount of goods that New Zealanders can order online. It’s a positive step but, alas, it was never going to be enough to prevent a spike in the unemployment rate, a permanent loss in economic activity and a correction in the housing market.
As New Zealand inches toward a less restrictive containment regime, it is imperative all and sundry recognize progress from here on will be glacial, surrounded in deep uncertainty and prone to the occasional big step backwards. Moreover, the environment in which we operate will not return to anything like normality for a very long time. Even when we do reach a new steady state that state might be quite different to the one we entered the battle against Covid-19 with.
Dare To Believe!
It’s a case of so far, so good. Unlike in many parts of the world, New Zealand has not yet experienced an exponential increase in the spread of Covid-19. This is predominantly due to the rigorous containment measures that have been adopted. Now is not the time for complacency but there is at least a glimmer of hope that some of us, at least, might be able to experience a less-restrictive world. Currently, the whole economy is under a Level 4 lockdown but there is now good reason to believe that both Levels 3 and 2 are an option by the end of April/early May if things go to plan.
Plan for the future!
The hit the New Zealand economy is going to take is getting bigger by the day. This will be followed by a substantial bounce but it would be very unwise for folk to think there will be a return to pre-crisis activity within the foreseeable future.
Q2 GDP Slump Deepens
Providing generic economic forecasts in the current environment is a complete waste of time. Whatever numbers we might concoct are nothing more than poorly-educated guesswork. Without knowing how the spread of Covid-19 is going to evolve, specifics become meaningless.
Rescue bid under way
The RBNZ has slashed the cash rate and eased the banking system’s capital requirements. Government is about to announce a massive spend up. The rescue mission is underway but, even with this help, be prepared for a significant economic downturn. It’s time to batten down the hatches. This is going to be a very rough ride.
Recession Plausible and Now Probable
On the 17th of February, we warned that a recession was plausible in New Zealand (Recession Plausible Not Probable). For all intents and purposes, the plausible has become the probable. A best-case scenario would now see Q1 and Q2 GDP record output growth a smidgen above zero. In contrast, the downside risk is building by the day. We are thus now formally forecasting at least two quarters of negative growth.