New Treasury figures show that the bounceback after leaving Level Two has been greater than forecast, but there are warnings that the worst is yet to come.
The figures were unveiled on a Bloomberg webinar yesterday by Finance Minister Grant Robertson.
Treasury has lowered its unemployment forecast now expecting it to peak at nine per cent rather than ten at the end of the September quarter.
That still means that the usual four weeks of the election campaign leading up to polling day on September 19 will be set against a background of unemployment rising to levels last seen in 1993 when the National Government only narrowly held on to power in that year’s election.
The wage subsidy scheme will end in the first week of August, leaving a gap of six weeks to election day when the impact of the unemployment may be at its most intense.
Not surprisingly, given these circumstances, Robertson was asked whether the Government would consider extending the wage subsidy. He gave a heavy hint that it might.
“When the wage subsidy extension comes to an end there’ll be another round of decisions to be made,” he said.
“Our wage subsidy scheme has had a very significant role in keeping people in employment and has allowed people the space to make decisions about the structure of their businesses.
“For a large part, people have been able to keep people on.
“But in some cases, they haven’t been able to do that.”
Treasury says the subsidy has so far cost $12 billion; that is four times the annual bill for health services.
It will thus have to end sooner or later, and that is when there are huge uncertainties about what might happen to the economy.
“The full extent of the rise in unemployment will not be apparent until the wage subsidy extension scheme ends later this year and other forms of business support are withdrawn,” said Treasury’s report.
“We continue to expect unemployment to rise considerably this year and anticipate that it will remain above its pre-pandemic level for some time, which will weigh on household income and spending.”
The problem facing Treasury and the bank economists is how sustainable the current mini-boom in the economy is. Is it a “sugar rush” propelled by pent-up demand?
Kiwibank Chief Economist, Jarrod Kerr told the webinar that the transactional data coming through the bank was bouncing back quite strongly.
“We saw Kiwis come out of lockdown with a little bit of extra cash that they had saved up,” he said.
“And I think the sugar rush of pent up demand is still playing through.
“But overshadowing all of that is the fact that we are in a recession and it’s a severe recession, and we’re likely to see an unemployment rate rise up to around nine, 10 per cent.
“And that will have to have flow-on impacts into broader consumption, housing market and the economy as a whole.”
He said that as a consequence, he had revised his forecasts higher.
“But we’re still facing at least another year of our borders being closed and a significant part of our economy, mainly tourism and parts of education, effectively still being locked out.”
It has become clear this week that the Government has no real alternative but to keep the borders closed until there is an effective vaccine.
National is arguing that the borders can open before there is a vaccine and Opposition Leader Todd Muller asked the Prime Minister yesterday in Parliament whether she was confident the borders could be opened “to international travellers” without a vaccine.
“A vaccine is not the only thing that will make a difference in the globe’s fight against COVID-19,” said Ardern.
“Other things that will be game-changers will be, for instance, successful treatment; whether or not we see a change in the way this pandemic is spreading, although we haven’t seen it to date.
“Yes, as the member says, a vaccine; but also rapid and accurate testing technology has the potential to change the dynamic globally.”
Ardern called Muller’s argument that the borders could start to be opened now “frankly dangerous”.
But there was a consensus among the economists at the webinar that the border would not be opening soon.
“How quickly can we return to some new version of normality where globalisation, trade flows, all that stuff can resume at a level people feel comfortable with,” said Yuong Ha, the Chief Economist at the Reserve Bank.
“That’s just a big unknown for us at the moment.
“If anything, the optimism that either a vaccine will be ready or we’d return to some baseline level of normality, that’s probably being pushed out given what we know now about some sort of the second wave of virus transmission as economies try to reopen.”
But the longer the borders stay closed, the more the tourism industries suffers.
“There is the gaping hole where tourism used to be,” said ANZ Chief Economist, Sharon Zollner.
“That has only just begun to play out.”
Robertson conceded that there was a need to get the tourists back.
“Yes, the border restrictions are very important to our status,” he said.
“And so, therefore, we do have to adjust, and we are still committed to working towards a trans-Tasman bubble and also a framework that would allow us to extend it to foreign countries that we believe are mutually safe.”
Ironically, the creation of a trans-Tasman bubble may have less of an aggregate economic impact than might seem likely.
In its report, Treasury said Australian tourism generated almost one per cent of GDP; $3 billion but New Zealand tourists going to Australia spent $2.3 billion.
But it is the tourism hole that dominates the outlook for the economy over the next year.
“It has been a rapid bounceback out of lockdown, that rapid move through the levels; the fact we don’t need to care about social distancing, that we can have 43,000 people at the rugby that our hospitality sector is operating as per normal; that’s worth a huge amount,” said Zollner.
“But the fact remains, there is the gaping hole where tourism used to be and that has only just begun to play out.”
Yuong Ha said some sectors were recovering well, possibly because of pent up demand.
But there’s still a lot of hard work ahead of us for both monetary and fiscal policy in all arms of economic policy,” he said.
“Because there is a big hole in economic activity and it will take time to fill that hole.”
Kerr said that what we had seen so far had been a bounceback in the economy.
“So that that all looks great and very v-shaped,” he said.
“But the damage has been done.
“We’ve got an unemployment rate rising towards 10 per cent; we’ve got a housing market which is going to come off; we’ve got construction in that housing market that’s going to slow down, and we’ve got a lot of issues in commercial space as more people are working from home.
“You’ve got another structural change which has been accelerated, and that’s retailing online and different ways of doing things.
“So we’ve got a lot to work our way through. And then in the background, we’ve still got our borders up to international tourism, and I can’t see those borders coming down without a vaccine.
“And I can’t see that happening for at least another year.
“So, yes, we look like we might have had a bit of a V.
“But we’re going to see spending activity; everything cool off again into next year.”
It will be how the two main parties address that probability which will undoubtedly form the core of the election campaign.