New Zealand Sees Shallower Economic Slump, Long Virus Impact

(Bloomberg) -- New Zealand’s economy will endure a shallower recession than previously expected but the coronavirus pandemic will have a longer impact on the country’s finances, according to government projections.

The economy likely shrank 3.1% in the year ended June 30, the Treasury Department said in its pre-election economic and fiscal update released Wednesday in Wellington. That’s less than the 4.6% contraction projected in the May budget. The jobless rate will rise to 7.8% by 2022, lower than the 9.8% peak anticipated four months ago, Treasury said.

Prime Minister Jacinda Ardern, seeking a second term in the Oct. 17 election, says her strategy to eliminate Covid-19 with a strict nationwide lockdown has been vindicated by a rapid economic rebound. Still, the government today projected more persistent budget deficits and higher net debt than forecast in the budget.

“There are signs that the New Zealand economy is robust, and that our plan to eliminate Covid-19 and open up the economy faster is the right approach,” Finance Minister Grant Robertson said. “However, global headwinds and this 1-in-100 year economic shock will have a long-term effect on the government’s books.”

The economy benefited from spending just seven weeks in lockdown, while a government wage subsidy cushioned the impact on household incomes, Treasury said.

Official data tomorrow will confirm the economy contracted for a second straight quarter in the three months through June, the nation’s first recession since 2010, though Treasury and bank economists have significantly scaled back the expected severity of the slump. Treasury tipped a 16% contraction, much less than the 24% it forecast in May, and said there are risks the decline may be even less.

Still, in the medium term GDP growth is projected to be slower than the budget showed. Growth will average 2.8% over the period to June 2024, down from 3.9% in the budget.

“While the outlook for the year ahead is firmer, the Treasury now expects a less vigorous rebound in the following years, with the level of GDP remaining even lower than in its budget forecasts,” said Michael Gordon, senior economist at Westpac Banking Corp. in Auckland.

Closed Border

The long-term recovery is slower than previously expected because of the more persistent impacts of coronavirus and predictions of a weak global economy impacting on trade and tourism. New Zealand’s border is assumed to stay closed throughout 2021, although there may be scope for some relaxation from the third quarter as a result of safe travel zones, the Treasury said.

Robertson said he wants to open the border earlier than Treasury has assumed if it can be done safely.

A weaker world outlook and slower pace of domestic recovery means nominal GDP will be about NZ$13 billion ($9 billion) less than projected over the four years to June 2024. That will curb tax revenue and build pressure on the budget position. At the same time, government spending balloons as it provides fiscal support to the economy, with expenses reaching 39.4% of GDP in 2021.

The budget deficit is projected to widen to NZ$31.7 billion in the year ending June 2021 from NZ$23.3 billion a year earlier. Deficits are likely to narrow but won’t disappear until at least 2034.

Net debt is expected to surge to NZ$130.2 billion or 43% of GDP at June 30, 2021. By June 2024 debt will blow out to NZ$201 billion or 55.3% of GDP –- a slightly higher ratio than projected in the budget because the economy won’t be as big.

Still, low interest rates mean finance costs are forecast to reduce, while an improved government cash position will allow the Treasury to reduce its debt program. New Zealand Debt Management today cut its 2020-21 bond sales program by NZ$10 billion to NZ$50 billion.

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