Kiwis kicking COVID-19 into touch; hard yards to come

With just one active case remaining, and that one nearly a month old, the reward for our hard-won success is that Kiwis can return to life pretty much as normal. It seems likely New Zealand’s restrictions will change to Level 1 in early June. This means life with no COVID-related restrictions - apart from the hardly insignificant fact the borders will remain closed for now.

"The recent bounce in spending is welcome but looks lacklustre in the context of how much spending was “lost” during lockdown.”

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Already, under Level 2, when compared with Australians, Google mobility data as of 21 May showed New Zealanders were more likely to be physically back at their usual place of work, equally likely to be back in the shops, more likely to be doing their grocery shopping online, and less likely to be going to the park versus the pre-COVID baseline.

Under Level 1, these numbers will normalise further.

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However, while the disruption is easing significantly, the recession is only just beginning.

Based on ANZ card data, the recent bounce in retail spending looks lacklustre once you factor in how much spending was “lost” during lockdown. And once the catch-up is done, ANZ Research doesn’t expect the current buying flurry to continue, with the full impact of economic weakness yet to be felt.

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Despite the wage subsidy scheme the employment picture coming out of the ANZ Business Outlook survey is pretty brutal. It shows expected profitability, investment and employment intentions are all still deeply negative, despite some small lifts. The Own Activity Index would need to rise 17 points even to match the lows of the last recession. It’s anything but business as usual at this stage.

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Employment intentions show a net 42 per cent of firms intend to cut staff. A net 36 per cent of firms say they now have fewer employees than a year ago - but that’s not even across the economy. Around a net 56 per cent of retail and services firms say they have cut staff numbers, while only a net 4 per cent of agricultural firms report having done so. ANZ Research forecasts the unemployment rate to hit double digits later this year before gradually improving.

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Historically, an elevated unemployment rate is anathema to housing market strength. House prices can be challenging to predict at the best of times but there are a lot of big pieces moving at the moment so forecasts are particularly uncertain:

• net migration is likely to be much lower due to fewer job opportunities but Kiwis abroad may come home in unexpected numbers;
• unemployment is definitely moving higher but how much and for how long is unknown;
•  mortgage rates have hit record lows and loan-to-value ratio restrictions have been removed but banks will be prudent with their lending in a riskier environment;
• the loss of international tourism will see some Airbnb accommodation made available for long-term rentals.

How all these things will balance out is unclear but the basic fact is when the unemployment rate goes up some people are put in a position where they have to sell at any price and that tends to result in sharper downward movement in prices than seen in a cool-down caused by more expensive or more constrained lending.

ANZ Research are forecasting New Zealand house prices to drop 10-15 per cent – though to put that in context, they are up nearly 9 per cent in the past year. And the mood has definitely changed.

Although households struggle to put the ‘right’ number on it (basically underestimating how much house prices swing around) they know what’s going on. For the first time since ANZ Research’s New Zealand consumer confidence survey began in 2010, consumers are expecting house prices to fall – ostensibly by just 0.2 per cent.

When adjusted for the predictable scale error, it’s consistent with ANZ Research’s forecast of a double-digit fall.

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Falling house prices will reinforce the downward pressure on the retail sector that’s resulting from the fact that many fewer people than a year ago think it’s a good time to buy a major household item. It has bounced back significantly since the lockdown but is still below where it bottomed in the last recession.

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The upshot of all this is that while New Zealand’s success in beating COVID-19 puts us in a much better position than many other countries, we have to be realistic that a New Zealand with closed borders is a smaller economy. And our major trading partners are in strife.

There’s no better place to be but it’s going to be a rough ride nonetheless as the economy adapts and changes shape. New, exciting opportunities will emerge in time, as they always do from any large-scale disruption to the status quo. But that might be hard to see for a while.

Sharon Zollner is NZ Chief Economist at ANZ