The country's finances are set to be in better shape than expected, with unemployment lower than forecast a few months ago, a surplus possible earlier than previously thought and potential future lockdowns less costly than thought.
Today’s half year economic and fiscal update (HYEFU) indicated less doom and gloom for New Zealand’s situation than that before the election – but it came alongside Treasury’s secretary Caralee McLiesh’s warning that there may still be economic scarring from this year’s blow delivered by Covid-19 and a continued increase in house prices.
House prices across New Zealand are projected to continue to rise with an 8.5 per cent increase in 2021. Comparatively the change is only forecast to be 4.5 per cent in 2022. The overall change from 2020 to 2025 is projected to be a 34.9 per cent increase.
Unemployment is expected to rise to 6.9 per cent by the end of 2021.
Net core Crown debt is forecast to peak at 50.7% of GDP in 2024 and the deficit is expected to rise to $21.6 billion in 2021.
Despite the return to varying levels of lockdown in August, McLiesh said recovery from the downturn “has been quite swift”.
The update indicated the extent to which lockdowns impact the economy was less severe, meaning any potential lockdown due to a future Covid-19 resurgence could be less costly than previously assumed.
“The outlook has improved, but uncertainty remains high,” McLeish said today.
“The pace of recovery depends on many unknown factors, including of course the virus, the speed and effectiveness at which vaccines can be rolled out, how quickly the global economy recovers and how behaviours and production might change.”
The uncertainty was also due to many businesses putting investment plans on hold, resulting in lower growth forecast for the second half of this year and first six months of 2021.
Finance Minister Grant Robertson said the economic blow was better than expected, improving even in the last couple of months.
The global rapid roll out of Covid-19 vaccines may be some cause for certainty, Robertson said.
“The fiscal position is still challenging. Many new Zealanders have faced tough times this year, and there is more to come.”
Treasury warned the forecast increase of unemployment could “worsen the distribution and scarring effects of Covid-19”.
Unemployment was expected to peak at 6.9 per cent by the end of 2021 – this was from the 7.8 per cent forecast before October’s election.
“Even peaking at 6.9, that’s a lot of people losing their job,” Robertson said.
“The prospect of nearly 10 per cent unemployment is not something I wanted to be part of,” Robertson said of previous forecasts.
If New Zealand’s recovery is stronger, unemployment could peak at only 6.2 per cent by June 2021.
McLeish attributed this lower than expected unemployment peak to schemes such as the wage subsidy, which helped businesses hold onto employees.
Despite this, youth, women, Māori and Pacific and Aucklanders were hit disproportionally by the downturn from border closers and alert level restrictions.
Untapped capacity, such as people in part-time work who want to work more hours, saw a sharp increase among women.
House prices were expected to rise 8.5 per cent for 2021, with an overall increase of 34.9 per cent from 2020 to 2025.
The constraint on urban expansion, intensification and pace at which new homes can be brought into the housing market, alongside the preference to invest in housing as a saving method, the likelihood of demand growth could keep price rising.
Treasury said a combination of a sustained period of high dwelling completion and/or the reduction of population growth due to border restrictions are needed to address the shortage build up.
“Based on past experience, prices are still likely to rise for some time given the backlog.”
Robertson said the Government was working through advice from Treasury and the Reserve Bank and would be hoping to make announcements and release a package of measures early next year.