New Zealand’s near-term economic outlook is “less negative” than previously expected, but the medium-term outlook has deteriorated due to the possibility the Covid-19 impact will be more persistent amid a worsening global outlook.
Treasury’s secretary Caralee McLiesh opened the country's pre-election books today - showing unemployment is expected to peak at 7.8 per cent in the March 2022 quarter, two per cent lower than forecast in May.
Summary of the Pre-Election Economic and Fiscal Update (PREFU):
- Annual average GDP growth expected to fall to -3.1 per cent in the June 2020 quarter
- GDP forecast to contract by 16 per cent in the June 2020 quarter
- Unemployment rate expected to hit 7.8 per cent in March 2022 quarter
- Core Crown expenses expected to reach $119.5b in 2020/21
- Deficit reached $23.4b in 2019/20, expected to worsen to $31.7b in 2020/21, 7.7 per cent of GDP at June 30, 2020.
- Net core Crown debt increased by $25.7b to $83.4b, sitting at 27.6 per cent of GDP at June 30, 2020.
Treasury forecasts $58.5 billion to go towards support for the Covid-19 fallout – with the assumption border restrictions are lifted at the beginning of 2022 and limited international travel from mid-2021.
Finance Minister Grant Robertson said the unaudited Crown accounts to June 2020 showed “a rebounding economy, with core Crown tax revenue of $84.9 billion coming in higher than the $82.3b forecast, indicating more activity than expected”.
He said the outlook for global economic activity was worsening, however the New Zealand economy was forecast to grow at three per cent a year over the next three years.
“Global headwinds and this one-in-100 year economic shock caused by Covid-19 will have a long-term effect on the Government’s books,” Robertson said.
“There will continue to be tough times ahead for many in our country.”
The GDP figures will be released tomorrow by Stats NZ – confirming whether New Zealand has been plunged into a recession due to the economic fallout of Covid-19.
“I was clear six months ago we would be in a recession. I’m sure we will be,” Robertson said, adding the forecasts indicated New Zealand could rebound quickly.
Net core Crown debt was 27.6 per cent of GDP in June 2020 and the deficit was 7.7 per cent of GDP – with the May forecast at 9.6 per cent.
The deficit reached $23.4b which was $4.9b lower than forecast in May.
The Government's books showed a $1.4b surplus with debt just below forecast before the economic impact of Covid-19 hit.
“The projections show the deficit caused by Covid-19 reduces steadily each year from 10.5 percent (2021) to less than one percent of GDP by June 2028,” Robertson said.
The numbers are subject to change as the statements are unaudited.
New Zealand’s unemployment rate is forecast to rise to 7.8 per cent in the March 2022 quarter, due to the continual impact of the border restrictions and the easing of fiscal support.
However, that is a drop from the 9.8 per cent forecast in May’s Budget.
McLiesh said it highlighted “considerable uncertainty”.
“Medium term unemployment remains persistently higher,” she said.
Treasury put the lower short term forecast to unemployment down to “Government support and a faster move to lower alert levels, [which] has helped to cushion the initial impact on unemployment”.
Robertson compared it to the expected peak of 10 per cent unemployment in Australia.
“The near-term economic recovery has been stronger than the Treasury and many economists predicted at the May Budget, as the economy bounced back strongly out of lockdown,” Robertson said.
Treasury expected the bounce-back in activity since the initial Covid-19 lockdown and the extension of fiscal support “to have promoted worker retention and prevented a sharper rise in the unemployment rate in the near term”.
“However, extended border restrictions together with weaker world growth compared to the Budget update are expected to slow the economic recovery.”
Unemployment is expected to ease to 5.3 per cent by June 2024.
The PREFU stated New Zealand’s housing market activity was more resilient than expected – “supported by pent-up demand, involuntary savings during Alert Levels 4 and 3 and looser monetary conditions”.
“However, various competing forces make the outlook for house prices particularly uncertain.”
It was expected a period of weaker house prices to June 2021 would recover “as net-migration rises, economic confidence recovers, and monetary policy remains accommodative throughout the forecast period”.
“Despite this improvement, the forecast contraction in GDP of 16 per cent in the June 2022 quarter will far exceed previous records,” McLiesh wrote.
She said it represented the “sharpest decline on record” but was still smaller than Budget forecast of 24 per cent.
“GDP falls a further 0.5 per cent in the year to June 2021, with annual growth then averaging 3.9 per cent over the final three forecast years. Persistent impacts of the pandemic are expected to reduce New Zealand’s potential output, slowing the pace of recovery.”
Annual average GDP growth
Activity has picked up faster than expected.
Annual GDP growth is expected to fall to -3.1 per cent instead of -4.6 per cent in the June 2020 quarter.