Are There Any Green Shoots Sprouting In The NZ Economy?

Monday, 14 September 2020, 4:29 pm
Press Release: Kalkine

Summary

• ASB Quarterly Economic Forecast suggests that the NZ economy is performing better than previously expected.
• The government’s recently proposed tax policy for top earners is expected to keep public debt levels in check.
• The NZ property market appears to be dancing to its own rhythm, logging astonishing recovery in the house prices.
• Business confidence seems to be bucking the trend, with companies being less pessimistic over the broader economic outlook.
• Declining retail card spending and retailer confidence, the growing challenge of containing second infection wave and distressed labour market scenario deserve closer attention in charting out the growth scenario.

While the Kiwi Land is battling with the second wave of COVID-19 infections and resultant lockdown restrictions, stronger than anticipated performance of the NZ economy has taken the world by surprise. Moreover, some optimistic signs of recovery are emerging as glimmers of hope for the nation’s swift revival from the pandemic-induced economic downturn.

The latest Quarterly Economic Forecast report unveiled by ASB Bank suggests that the NZ economy is performing better than previously expected. ASB expects the nation’s economy to shrink by 5 per cent Y-o-Y by the end of 2020, as against its earlier forecast of 6 per cent dip.

ASB believes that Auckland’s relatively swift movement from stringent lockdown in March to Alert Level 1 restrictions in June has limited the extent of short-run economic carnage.

While the economy is not off the hook yet with Auckland under partial lockdown, some green shoots gleaming in the NZ economy are instilling hopes of sooner than expected revival from the Global Virus Crisis:

Government’s New Tax Policy: A Shot to Keep Debt Under Control

Kiwi Land’s existing debt levels are already lower than in several other countries. The government’s recently proposed tax policy for top earners is further expected to keep the public debt in check. NZ Prime Minister, Jacinda Ardern, has lately proposed a top tax rate of 39 per cent on Kiwis earning above NZD 180,000 a year as a balanced plan to control the growing debt levels.

Affecting just 2 per cent of the Kiwi population, the planned tax policy is expected to generate extra revenue of NZD 550 million per year. Additionally, the government has also put forward a Clean Energy Plan to create fresh jobs and support COVID-19 economic recovery.

The mounting public debt has been a cause of concern for Kiwi Land, utilising government borrowing as a tool to cushion the blow of COVID-19 pandemic on the economy. However, the nation appears to have more room to accommodate further debt in the economy, with debt levels prevailing below international standards. Besides, the impact of the new tax policy may be further monitored.

Housing Market: Overriding the Second Lockdown

The NZ property market appears to be dancing to its own rhythm. Defying the pandemic uncertainty, property space has been logging astonishing recovery in the house prices. The latest statistics from REINZ (Real Estate Institute of New Zealand) demonstrate that median house prices across NZ fostered by 16.4 per cent in August 2020, with national and Auckland property prices reaching all-time record levels.

Several factors at foreplay contributed to a remarkable upsurge in property prices. These include reduced interest rates, lack of listings, removal of LVRs (Loan to Valuation Ratio), demand catch-up post lockdown, people’s aspiration to have a bigger backyard/more space and first-time buyers’ desire to enter into the market

While the property market seems to be going against all the norms and surpassing predictions, it may not have realised the full impact of COVID-19 given its nature to react slowly to economic movements. It is yet to be seen whether the momentum in house prices continues for the rest of the year or faces some sort of storm.

Interesting Read: Five-Point Action Plan to Survive COVID-19 Storm

Business Confidence: Bucking the Trend

Despite the second round of lockdown restrictions, NZ’s business confidence seems to be bucking the trend, with companies being less pessimistic over the broader economic outlook. The preliminary data unveiled by ANZ noted a considerable surge in NZ business confidence by 16 points in September 2020.

Investment intentions also improved by 14 points in September, with just 1 per cent of the firms anticipating cutting back on investment. The preliminary data saw a widespread increase in the forward-looking activity indicators, in spite of the recurrence of coronavirus cases in the community and the related Alert Level 2 or 3 restrictions.

While business activity indicators in September reached their highest levels since February, these are still prevailing below their pre-COVID levels. Rebound in employment levels, resumption of overseas travel, dedicated fiscal and monetary push and effective containment of the second wave are expected to chart out the future course of business activities.

Bottom Line

Kiwi Land seems to be in good stead than the rest of the world in mounting a quick economic recovery. However, one needs to be ultra-cautious before drawing an over-optimistic view. The lens needs to be further zoomed on other economic parameters such as declining retail card spending and retailer confidence, growing challenge of containing second infection wave and distressed labour market conditions.

Good Read: NZ Economic Charter: Three Silver Linings in the COVID-19 Cloud

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