Westpac economists say it now looks like our economic downturn will be 'at the more moderate end of expectations'

Westpac economists say it now looks like our economic downturn will be 'at the more moderate end of expectations'

Some key economic indicators have risen by more than expected and the downturn now looks like it will be at the more moderate end of expectations, Westpac economists believe.

They say in their Weekly Economic Commentary, however, that conditions are mixed across the economy, "and we are encountering strong headwinds that will be a drag on growth as we head into the new year".

Provided the coronavirus remains contained, New Zealand is on track for a classic ‘V’ shaped recovery, with the sharp drop in the first half of 2020 followed by a bounce later in the year, the economists say.

"We’re forecasting the estimated 15% drop in GDP through the first half of the year will be followed by a 14% bounce in the September quarter. However, that would still leave the economy 3% smaller than it was at the end of 2019."

They note the recent strength there has been household spending.

"During the lockdown in April, household spending on items other than groceries fell by 90%. But as the Alert Level has been rolled back, New Zealanders have been giving their credit cards a good workout. Spending in June was up 8% on the same time last year. There’s been particular strength in spending on household furnishings, which may have been boosted by the fact that we can’t take overseas holidays. New Zealanders have also been returning to bars and restaurants."

They do say though that some of the recent strength in household spending is likely due to "pent up demand after" the lockdown, which might not be sustained.

"In addition, we expect some easing in spending later this year as the Government’s wage subsidy schemes come to an end. Even so, the recent strength in household spending is an encouraging sign. It points to underlying strength in household spending appetites despite some powerful headwinds, including rising unemployment."

The economists note that New Zealand’s agricultural sector has been weathering the Covid storm relatively well, and while the primary sector still faces a number of hurdles over the coming year as a result of the Covid downturn, the sector is relatively well-placed to meet the economic challenges over the coming year.

However, while in the economy in general some positive near-term indicators for demand are visible, many businesses are still wrestling with some big challenges.

"Notably, businesses in the service sector have reported very weak activity in recent months, with the lack of international tourists a significant drag on demand for many firms. There is also evidence of broader business sector weakness, with many businesses in other sectors also reporting soft trading conditions in recent months."

They say that putting everything together, the New Zealand economy is still facing some significant challenges over the coming months.

"Many businesses have been left with a hole in their earnings following the lockdown in late March and April. In addition, the combination of a weak global economy, the closure of our borders and increases in unemployment will be a significant drag on demand. Against this backdrop, we expect that GDP will remain below its pre-Covid trend for an extended period.

"However, given our success in limiting the spread of the virus and the signs of firmness in demand, it looks like the downturn in the New Zealand economy will not be as severe as we had previously feared."

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59 Comments

18
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I don't think so, some of the top people in the USA are picking an L shape with years of recovery. We are not immune from what happens in the USA and a V is far to optimistic or is that more a case of hope then optimism. The world is nowhere near out of the woods on this yet and I think thats the really hard part to grasp for most people.

But we can still bounce up to a V-shape (3% down on 2019), and then flat-line and drop back down from there as the international situation, and local stimulus such as wage subsidy and mortgage deferrals expire.

That's more like a square root recovery in that case.

Inverse square root.

How stocks perform these days shows everything, we are far from full recovery. It might take years to go back where we were at before covid happened. It might be a bit better than level 4 lock down. As most of other countries economies are still taking big hit from covid. There is no way New Zealand can be immune from it.

13
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So as per Westpac economist we are at the bottom of V and from here on everything will be positive.

Good Luck to all those who have and are loosing jobs or have taken reduced hours/wages and sectors like Hospitality, Travel, Education, Retail...and Regions that tottaly depend on tourist/students like Otago...

Is one of the pillar of NZ economy not Immigration number, which is required to boost economy or will returning Kiwi fill in the gap/spending but if an expert is saying is correct than one can go all out as everything is UP UP and UP from here on.

You can lose a job, have lost a job, even face losing a job. Very unlikely to loose a job however, or even loosing a job.

Apologies, it's just my thing.

Real impact on nz economy will not be clear til end Sept as data so slow to be released
3% loss seems tad too optimistic

Some key economic indicators have risen by more than expected and the downturn now looks like it will be at the more moderate end of expectations, Westpac economists believe.
Hmmm... the government certainly cut key interest rates for Kiwi Bond investments by 25bps.

I noted yesterday:

Thus, the decline of interest rates to zero corresponds with a monetary imbalance in favor of deflation, if at least an abundance of deflationary pressures. This is something that Milton Friedman also talked about, particularly in 1998 with regard to Japan. He called it the interest rate fallacy, meaning that low nominal interest rates signify "tight" money conditions, or what would be consistent with significant deflationary pressure. It is and remains a fallacy because economists like those at every central bank around the world have decided instead that low rates are only "stimulus."

To correct this view, Friedman pointed out the basic, non-trivial distinction between a liquidity effect and an income effect. Low rates can be stimulative in the short run (the liquidity effect), but over the long run their persistence means something far different. A yield curve is supposed to be upward sloping given the core time value of money and investing. That arises from opportunity cost, meaning the more plentiful the opportunities the greater the time value and the steeper the curve (the income effect). Yield and/or money curves (the eurodollar curve and even the history of the OIS curve) that collapse and remain that way unambiguously demonstrate that "stimulus" deserves only the quotation marks. Link

The pessimists here who are determined that the NZ economy will suffer a deep, dark and drawn out recession might be in for a surprise.

TTP

On the other hand, is this going to migrate here from Australia? Most probably....Not even an island being an island in the current environment.

While (one of ANZ Bank's most senior bankers) said, the property market has not crashed, he said the outlook for prices was uncertain, and some borrowers would need to consider selling.
"The growth that you might have anticipated might not come, so at some stage, you’re going to have to say: ‘If I can’t afford this mortgage, am I better off to rent, put my capital aside and wait until I’m in a better position to buy back into the market?
I just think there are people who are going to have to make those decisions in the next few months."

https://www.smh.com.au/business/banking-and-finance/struggling-borrowers...

11
up

I guess I'm a pessimist - and a very much hope that I am in for a surprise. But hoping something will be the case is not the same as believing it will be, and I'm afraid I just can't see how we can escape a recession, given that our economy does not operate in isolation, and the effects of Covid on the economies on our major trading partners.

The most forlorn words in a language are, "If only...."
The current environment is not about 'making a pile' when everyone else is gloomy. It's about "having something to re-start with" once the worst is past. That's actually why interest rates are so low - preservation of capital.
It doesn't matter when any of us determine that 'it's over'. It only matters that we have something to get going again with whenever we decide that is.
And many who have their wealth tied up in illiquid 'investments' might find they have nothing left to re-start with, and residual debt.....

Who said anythign about escaping a recession?

"We’re forecasting the estimated 15% drop in GDP through the first half of the year will be followed by a 14% bounce in the September quarter."

i.e. they are forecasting a recession followed by a recovery

Fair point. I should have been specific that I was talking about escaping a drawn out recession. I hope we do have a quick bounce back, but unfortunately I think it is unlikely.

AL123 - We are already in the sept quarter which will show solid growth so technically the recession is over. It is true our trading partners are still dealing with the virus but if you look at our terms of trade they are still very solid. You are in for a surprise, try being an optimist it's way more fun !

The realists are in for no surprise at all. The deluded will be.

As I said before - that number included you in March, and you were telling everyone who would listen that you saw the end of times coming.

28
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So we lose our largest industry and life goes on without any repercussions?

We're an export-led economy and all our major trading partners are suffering, but we're somehow immune and we'll emerge better than them?

OK, sure.

We haven't "lost" it. Kiwi's can't go abroad now, so they're going to be taking a local holiday. It may take a very substantial haircut, but it's not lost.

Sure.

e.g. What proportion of New Zealanders can afford (or have ever been able to afford for that matter) to get to Queenstown, let alone stay and spend there?

We're a family of 4 with household income over $300k. We're not going anywhere and find most of NZ's tourism either cringe kitsch or a gross rip-off compared to elsewhere. Especially Central Otago.
So who exactly is this mythical demographic of Kiwis that are going to pick up the allllll that slack in the Tourism sector?

We're in a similar position. We recently had a nice trip down to Rotorua. The suite at the Novatel was quite reasonably priced and what really surprised us was that the hotel was at capacity! This was the first open weekend after lockdown.

Hopefully we'll do Queenstown soon. So we are the "mythical" demographic. Our friends are doing similar things.

It is expensive, especially when compared to Fiji etc. It can feel like a "rip-off". The difference is the companies are paying Kiwis and complying with Kiwi law. The sector will adapt to what we're all prepared to spend.

Yeah, am I supposed to be surprised that everyone ran out to go on holiday the first weekend after lockdown?

The question is whether they will be 6 months later.
And 6 months after that.

You still didn't ask my question?
How many people are in our broad demographic given NZ's median houshold disposable income is $39k and New Zealand had 5.1 million visitors last year.

Especially in the tourism sector companies tend to employ immigrants with work visas and low wages so it is not that they are paying them 100K+ a year to justify their prices.

obvious[y not you. If you've got 300k + income, and you're moaning about high prices.. you need to sort out your budget. Maybe quit the avo on toast. BTW nobody put a gun to your head and forced you to breed

16
up

"Sort out my budget"?
"Maybe quit the avo on toast"?
I've got whiplash my head rocked back so hard.

You know why I'm not holidaying?
Because I. am. *budgeting*.

You know what I'd do if I went on holiday?
Go out for brunch and eat avo on toast.
I could. But I'm not, I'm *choosing* not to, because I'm *budgeting* and I'm kinda worried about my job security given we're, you know, IN THE WORST ECONOMIC ENVIRONMENT OF OUR LIFETIMES. In case that needed to be spelt out to you.

Oh, and BTW, my choice to "breed" will ultimately fund your *unfunded* Super. You're welcome.
Seriously, are Boomers completely devoid of logic?

I'm your kindred spirit cmat.

Cmat - NZ's terms of trade to date are unaffected, our products are still in demand hence in part why we are in a V recovery !

May be our biggest industry, but will it have the biggest impact when a significant number of employees were tourists on work visas, and a goodly chunk of the profits were going straight offshore? If the benefits weren't accruing to NZ in the first place, why would we notice when it's gone?

Sure,

Just like how Tiwai closing won't have any impact on Southland coz it's owned by Rio Tinto, who are foreign.
Right?

"Against this backdrop, we expect that GDP will remain below its pre-Covid trend for an extended period."
That doesn't sound like a V-shaped recovery at all. Perhaps an L with a barely noticable slope?

15
up

How can they call a V shaped recovery when the Global economic situation is in a worse position than the GFC, there is more unemployment to come for NZ, we still have Covid circumnavigating the globe causing all sorts of headaches and our borders are looking to be closed for a long time off yet. I believe NZ will have a faster recovery than many other countries but I have a tough time seeing a V shape.

You got it in one Adam.

Got to keep the shareholders happy!

It's a great time to be a food producing country. Most other stuff you can do without for years....

Haha.. make sure all the deck chairs are tidy and find an empty lifeboat, women and children first.. after me

It's a great time to be a food producing country. Most other stuff you can do without for years

As long as you're not in a business selling 'nice to have' food products with hefty margins. They will be doing it tough.

So now we have a Westpac guy saying "we're gonna have a V shaped recovery", others are saying it will be an"L shaped" recovery, still others are saying a " U shaped" recovery. My take on it is, none of them really have a clue and it's all guesswork.. informed or not. It's a bit pointless to try to second guess the so called experts but when none of them can seemingly sing the same song.. who knows. My call.. buy cheap quality and sell the hype. Made 100K on a cancer diagnostics Company over the last 3 weeks but what do I know? Equity markets.. such a magical place..

Made 100K on a cancer diagnostics Company over the last 3 weeks but what do I know?

Did you now. Want to divulge which company?

Pacific Edge. Surely.

Now he's told us about his winners he should tell us about all his other positions.

Please click on the below to see a well researched current piece of journalism on the dominoe debt effect:
https://mobile.abc.net.au/news/2020-07-10/the-dominoes-in-the-australian...

In reality, if you're not carrying debt, who actually gives a brass razoo. Collateral damage due to debt holders failing always opens opportunities for others.. our wondrous capitalist society will sort itself out

One could only wish. The path of least resistance seems to be the devaluation of money to prop up asset prices.

10
up

The article is not pessimistic enough for this website. I demand a rewrite.

I don't have a high opinion of most economists and reading stuff like this only serves to harden that view.

This is pure puffery, based on what? Nothing more than an upsurge of spending after lockdown and somehow concluding that this will give us a V shaped recovery.
That is highly unlikely. The much touted trans Tasman bubble has been pushed a long way back, the crutch of wage subsidies will come to an end and will be followed by a wave of job losses and business closures, while the global economy is in poor shape. At best, I think we face a W shaped recovery.

if we start slowing down when the subsidies subside, I think Jacinda will put her foot back down on the accelerator - more subsidies, more spending, more borrowing.

Fortunately, New Zealand has plenty of scope to borrow. Unlike much of Europe and the UK we're not up to our eyeballs in public debt.

Boohahahaha, really? NZ is a split step from bankruptcy. 56% of gdp and counting.. won't be long and we get classified as the banana republic we actually are.

Yeah, be nice if we did bounce straight back, but don't have high expectations of it actually happening. Only reason it's remotely convincing is that we're still floating along on massive subsidies.

Judging from my time spent shopping and dining this weekend, there does seem to be a bounce going on. Things are "buzzier" than I ever remember - packed carparks, restaurants, shopping malls etc.

Obviously this only the surface of the economy, but the strong consumer sentiment coupled with the relatively strong primary industries has me quietly optimistic. Shares are off in la-la land so difficult to make any judgement based on that. Housing seems to be taking a hit, but frankly that is a good thing.

I reckon little old New Zealand is going to be just fine!

We were out shopping the other day in Auckland. Fairly busy but didn’t have to queue to pay for any purchases. Lunchtime cafes not busy at all. Have witnessed this at Sylvia Park too. Lots of people wandering around but not carrying purchases.

I think Westpac economists are being a tad over-optimistic

With the world going through a sh~storm of epic proportions a V shaped recovery seems an astonishing call.

From where I am sitting we are seeing a bit of catch up spending on short breaks and consumer goods because people were locked up for eight weeks.

The school hols plus a bit of saved cash plus nice weather AND THE WAGE SUBSIDY is giving the appearance things are getting back to normal when they really aren't.

When he said 'V shaped' did he raise up his index and middle fingers and perform a rapid up-down motion whilst giggling to himself?

The last time I believed a bank economist was late last century. Nothings changed.

Global dairy trade fluctuated 14% upwards last week, which if it were maintained for most of the season would see Fonterra's payout at $7. If it had instead fallen by 14% ( and stayed there ) the payout would look more like $5.30. What economic activity we generate internally is just churn, it does nothing to increase NZ's purchasing power. For that we need export income, and for that to happen we need customers who are able to pay. As the rolling maul of Covid induced unemployment spreads around the world such people will be harder to find, and we will likely have to accept what we can get for our produce. The probable outcome will be a long drawn out deflationary spiral, both in NZ and worldwide.

Too early to call ? We are not out of the woods yet completely.

I think we actually need a deflationary spiral; took my sister's car to the dealer to get it's annual WOF the cost of which is about $55. The car's only done just over 80,000 kms and I ended up having no change out of $800. ( 80,000 kms equals approx 45,000 miles which was more or less the mileage at which the motor of a 1950s and 1960s car was considered to be just 'run-in' ).

Tried to get some info on my storm-water drains last year and had to make 3 trips to the city offices and still couldn't get it. Two of these fruitless journeys were when a duty engineer should have been available to the public but wasn't. Had to grovel at the counter in the end and reception said they would make a special effort to get someone to phone me; two weeks later someone finally phoned me with the info. I thought Council staff were highly paid, and therefore would be more expeditious in helping a ratepayer.

Mostly a realistic analysis, except for the fact that it is completely unrealistic to predict a 3% YOY drop in GDP since there is no international tourism at all nor international students. Unless they expect NZ will open their borders before the end of the year which would just happen if a safe vaccine is developed before then, which is highly unlikely.

Forget about V shapes or U or L shapes .............. we dont have an alphabet character to describe the shape of things to come .

This is going to be a long slow hard recession .

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