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."