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New Zealand Economy Facing Biggest Activity Drop Ever Seen

Matthew Brockett

(Bloomberg) -- New Zealand’s economy could contract by as much as 10%, the jobless rate will jump to levels not seen in almost 30 years and prices are likely to start falling.

Those are some of the dire initial estimates of economists as they try to forecast the economic impact of the coronavirus, which has forced the country into a nationwide lockdown.

“All forecasts are nonsensical but we think it important that folk understand the shape, if not the magnitude, of the way ahead,” said Stephen Toplis, Head of Research at Bank of New Zealand in Wellington. “New Zealand will witness the biggest quarterly decline in activity ever seen. Never have we experienced a shut-down which is so widespread and so sudden.”

The abrupt, total cessation of tourism, New Zealand’s largest source of foreign-exchange earnings, has dealt the economy a sucker punch. Weaker global demand for its food exports will also hurt. Now the nationwide lockdown, which will remain in place for at least four weeks, has brought the entire country to a virtual standstill.

Toplis said he’s penciled in a 5% contraction in the second quarter alone, “but it could easily be more than double” that.

Infometrics chief forecaster Gareth Kiernan estimates a contraction of almost 9% over the first two quarters of 2020, while ASB Bank chief economist Nick Tuffley said he expects the economy to be around 7% smaller once it has emerged from the lockdown -- more than twice the 2.7% decline experienced during the global financial crisis.

‘Short, Sharp Shock’

“Obviously the economy is going to contract enormously in the second quarter because of the lockdown,” said Tuffley. “It’s a short, sharp shock in the near-term.”

Unemployment is seen jumping from 4% to 8% by ASB and to more than 9% by BNZ, which would take it to the highest level since the early 1990s.

Infometrics sees house prices falling by as much as 10% over the next 12 to 18 months. BNZ also expects general prices to fall, predicting the consumer price index will drop in the second quarter.

Government debt is expected to balloon from 19.5% of GDP now to as much as 50%, as it borrows to fund multi-billion dollar fiscal rescue packages. To ensure there’s demand for those new government bonds, and to keep interest rates low, the central bank has been forced to launch a NZ$30 billion ($17 billion) bond-purchase program.

But as sudden and painful as the recession is likely to be, economists said New Zealand could be well placed to eventually stage a swift recovery, particularly if it can successfully keep the virus at bay.

“However horrific the number turns out to be, it should not be seen as the beginnings of a great depression,” said Toplis. “At some stage in the next 12 months, we should also be celebrating the biggest quarterly bounce in activity ever.”

The dramatic drop in the New Zealand dollar -- it has plunged almost 14% against the greenback this year -- should aid exporters during the recovery.

Kiernan said New Zealand’s heavy reliance on exports to China, often seen as an Achilles Heel, may prove fortuitous as the country where the virus originated looks set to recover sooner than the rest of the world.

“New Zealand’s position as a food exporter to China places us in good stead,” he said. “If the Chinese domestic economy is functioning relatively normally, its people will still need to eat.”

(Adds current jobless rate in eighth paragraph)

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