Treasury has released scenarios of the economic impact of the Covid-19 lockdown – seeing unemployment hit 25 per cent if the lockdown lasts for six months, but kept under 10 per cent in another scenario with a four week lockdown and an additional $20 billion of spending.
Scenario one looks at if the Alert Level 4 is kept for one month, Level 3 is kept for another month and Level 1/2 is kept for 10 months. All scenarios sees a border closure for one year.
Without any fiscal support from the Government beyond the $20 billion already announced, this sees unemployment reach 13.5 per cent this year in the June quarter, declining to 8.5 per cent in 2021. The one year border closure sees services exports fall to one-third of previous levels and a $16 billion loss over the year ending March 2021.
In the March quarter, unemployment sits at 4.5 per cent in 2020 and 9.5 per cent in 2021.
"In the labour market, the unemployment rate rises sharply, to 13 per cent in the June 2020 quarter before gradually easing as alert levels are lowered and more activity occurs," the report states. "The rise in unemployment is mitigated by existing fiscal support and slower labour supply growth, as both net migration inflows and labour force participation fall."
It says the negative impact on household incomes flow on to house prices. "Similarly, business investment is restrained by lower profits and the weaker demand outlook. Negative confidence effects or impediments to the flow of credit."
It also predicts a GDP fall of 25 per cent in the June quarter, pulling up to 20 per cent in September quarter "as the lower Alert Levels enable a greater range of economic activities to resume".
With additional fiscal policy measures of another $20 billion to households and business, scenario one sees unemployment fall to 8.5 per cent in 2020 and 5.5 per cent in 2021. It sees nominal GDP loss to $20 billion.
With additional funding, it stopped unemployment from rising beyond 10 per cent and reduces the loss in nominal GDP by $20 billion.
Scenario two relies on Level 4 being kept for three months and sees unemployment go to 17.5 per cent in 2020 with no additional fiscal response.
However, with an additional $40 billion, unemployment sits at 9.5 per cent in 2020, bouncing back to 6 per cent in 2021 and 5.5 per cent in 2022.
Scenario three sees Level 4 for six months and has unemployment going to 22 per cent in the June 2021 quarter.
For the March quarter, this is at 24.5 per cent in 2021, dropping to 12.5 per cent in 2022.
Scenario four has Level 4 for three months, Level 3 for three months and Level 1/2 for six months, pulling unemployment to 17.5 per cent in 2020 and 14 .5 per cent in 2021.
"Scenario 4 might be interpreted as a scenario where the Alert Level initially de-escalates, but is later re-escalated," it says.
Scenario five is the same as scenario one , but relies on the world annual average real GDP growth at 3 per cent in 2020 and 4 per cent in 2021.
Unemployment goes to 13.5 per cent in 2020 and 10.5 per cent in 2021.
Secretary to the Treasury Dr Caralee McLiesh said the seven scenarios are "based on a range of times spent at different alert levels, the impact on economic activity at each alert level, and the degree of fiscal support".
"There are a wide range of possible impacts depending on which scenarios you look at.
"Annual average GDP growth is shown to fall by as little as 0.5 percent or as much as 23.5 percent in the fiscal year ending 30 June 2021, and estimates of the unemployment rate in the June 2021 quarter range from 5.5 percent to 22 percent. Two of the scenarios illustrate the cushioning effect of greater fiscal support on GDP and unemployment."
"What they do provide is insight into some of the possibilities that the Government and officials will consider as we develop responses to COVID-19 and plan for a solid economic recovery."
Finance Minister Grant Robertson said the scenarios would not be a guide as to the Government's decision on changing alert levels.
"That decision will be taken on April 20 as the Prime Minister has foreshadowed. What they do show is how important it is that we continue to unite against COVID-19 and follow the public health guidelines; stay home and save lives – we know it’s working."
"New Zealand’s underlying strength means the economy can bounce back to be $70 billion larger by 2024 than in 2019."
He said the scenarios showed unemployment could have gone to 13.5 per cent in scenario one without additional support, with peaks of 17.5-25 per cent in others.
"Work on further significant Government investment to protect jobs, support cashflow, and prepare the economy for recovery is well advanced. The next steps in the Government’s plan to support businesses will be released later this week.
"The Budget is also another important part of the response, and it will include significant support to respond to and recover from COVID-19. As is usual with the Budget, there may well be pre-announcements, especially where they relate to urgent COVID-19 response activities," Mr Robertson said.
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