[Analytics] New Zealand’s roadmap to recovery

New Zealand Prime Minister Jacinda Ardern was being interviewed on breakfast television when an earthquake struck on May 25, 2020. PHOTO: REPETEPRO/TWITTER. Sketched by the Pan Pacific Agency.

New Zealand managed to contain its second wave of COVID-19 and recent signs point to a V-shaped economic recovery for 2021. Stringent measures eliminated the spread of COVID-19 in the community. Bar the effects of continued border restrictions, things are largely moving back towards normal for New Zealanders. Christina Leung, Dion Gamperle specially for the East Asia Forum.

The rebound in economic activity with each move down the country’s alert levels is encouraging. It points to the success of the unprecedented stimulus measures injected by the government and the Reserve Bank. The wage subsidy scheme — which covered around 70 per cent of a firm’s wage bill — as well as lower mortgage rates, increased spending on infrastructure and higher welfare payments are supporting a recovery in demand. Housing demand is rising quickly as low interest rates encourage yield-seeking behaviour among investors, with the wealth effects from higher house prices supporting a recovery in retail spending.

Strict border controls have wreaked havoc on the tourism sector — previously one of New Zealand’s largest sectors. The wage subsidy scheme is helping many New Zealand businesses stay afloat in the face of a loss in tourism income, giving them time to reorient towards servicing the domestic market. Despite a loss of 11,000 jobs through the first lockdown, unemployment fell briefly in the June quarter reflecting the inability of people to look for work, before rising to 5.3 per cent in the September quarter. There are likely to be more job losses in December 2020 when the wage subsidy scheme comes to an end.

Business confidence is recovering as demand improves. The latest NZIER Quarterly Survey of Business Opinion shows businesses are feeling more positive about hiring staff. The building sector is becoming particularly buoyant as the pipeline of construction projects increases, particularly for government work. The government has committed another US$14.5 billion to infrastructure projects as part of its attempts to kickstart economic recovery. This spending is mostly concentrated in transport infrastructure — but the jobs created from this spending are unlikely to offset the job losses in the tourism sector.

The Labour Party claimed a decisive election victory on 17 October 2020, managing to secure the first majority government since the mixed-member proportional system was introduced in 1993. This result removes one aspect of uncertainty for businesses, enabling them to get on with planning for the year ahead. Businesses are less cautious about committing to investment in plant, machinery and buildings.

The COVID-19 outbreak presents enormous challenges for New Zealand, but also opportunities. The government has a chance to reshape the economy in ways that can improve the wellbeing of all New Zealanders. Border and quarantine restrictions are having a severe impact on New Zealand’s services exports — primarily tourism and international education. With the relaxation of border restrictions likely some time away, businesses will need to find new ways to adapt in the new environment — for example through targeting new markets, operating through a different channel, or providing a new good or service.

The government is taking on an unprecedented amount of debt to stimulate the economy. All spending has costs and benefits — good quality spending should result in longer-term benefits which outweigh the cost of the taxes that will be required to fund it. Beyond the short-term handouts to tide households and businesses over the disruptions caused by lockdowns, spending needs to focus on creating a more resilient economy with a workforce and environment that can more readily pivot to growth areas — such as food-based production.

This should include spending on education and retraining to equip the workforce with new skills and physical infrastructure to make regions more accessible. Improving accessibility will allow people to move between regions more easily, as well as increase connectivity so businesses can reach customers and people can work and learn remotely.

Christina Leung is Principal Economist and Head of Membership Services at the New Zealand Institute of Economic Research (NZIER). Dion Gamperle is an economist based in Wellington and a former analyst at NZIER.

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