In this Herald Premium article, the NZ Herald’s Matt Nippert and Keith Ng pick through forecasts and data to find an economy doing better than anyone predicted. As Auckland confronts a second round of community transmission, the gap between predictions and reality might hold clues that can help government and business safeguard the economy.
When Statistics New Zealand made its big announcement late last week, the resulting cries would suggest that it was the sky and not the rate of unemployment that had fallen. The official rate of unemployment for the three months to June declined from 4.2 to 4%, dramatically undercutting predictions from both bank and government forecasters who earlier in the year were picking that number to be at least double.
Forecasts – from both bank and government forecasters – were wrong.
“We’re the least wrong, we always had the lowest, but – gosh – this is quite low,” said Westpac chief economist Dominic Stephens in the hours after Wednesday’s announcement. Westpac had been amongst the most bullish of the bank forecasters, yet still predicted in April that last week’s number would be nine.
ANZ, the most bearish of the banks, in April said we’d be seeing unemployment at 10.7% by last week. Sharon Zollner, ANZ chief economist, is sticking to her guns and says the only thing they’ve got wrong is timing. “We’ve barely revised our forecasts. What we’ve done is pushed out the peak of unemployment by a quarter – we’ve still got it hitting double digits,” she says.
Even Statistics NZ, in an unusual move to account for their unemployment survey occurring during a lockdown when the labour market was effectively frozen preventing anyone seeking non-essential work, suggested a truer rate would be closer to 4.6%.
This is still far from what was being forecast. Even the central government boffins at Treasury, preparing for the budget in May, reckoned we’d this week be hitting 8.3%. A month earlier, as the country teetered on the brink of an uncontainable outbreak, worst-case modelling had a full quarter of the workforce unemployed.
The June quarter was a tale of two dramatically contrasting halves, bookended by one the world’s most restrictive lockdowns in April before transitioning into one of the globe’s most relaxed regimes by June. This whiplash may explain why predictions have had such difficulty getting any grounding.
Small business payments data from accounting firm Xero showed revenue plunged 39% in March, but had almost completely recovered to 2019 levels by June. Our extremes – both in shutdown and in bounceback – far outstrip similar figures from Australia and the United Kingdom.
A predicted wave of insolvencies flowing from the downturn has also yet to even hint at an appearance. Analysis by the Herald of wage subsidy recipients, and Companies Office liquidation data, shows only one in 1,000 companies – under 100 firms – who flagged financial problems and sought subsidy assistance have collapsed. The rate of company administrations in June and July are actually down 50% on a year earlier, although the wage subsidy schemes and changes to the treatment of insolvency sparked by the crisis may be only delaying this wave breaking rather than holding it back completely.
For the past two months economic data – physical and online traffic loads, electronic payment levels, electricity use – has consistently suggested that the second wind found in level one is seeing our new normal remarkably close (with the exception of industries hamstrung by closed borders) to the old normal of a year earlier.
“Quite frankly, people are having a bit of trouble accepting that the economy is in a much better position than we thought,” Stephens says.
There were widespread doubts over the costs of disruption caused by a nationwide shutdown, he says. “No one knew if you could turn the lights back on like that. But we actually do it every Christmas.”
The gloomy predictions partly came from perspective, and our position at the bottom of the Pacific Ocean has allowed a peek into the near future – albeit an alternate one where the virus’s spread has largely not been contained. New Zealand exploited Covid’s spread lagging several weeks behind much of the world when making a rapid policy pivot to suppress Covid, but also meant we had an advance preview of the dire economic fallout among our international contemporaries and trading partners.
In Australia, unemployment has already reached 7.4%. In the United States the crisis has seen this rate leap to 14.7%. And on the GDP front, the pandemic has caused unprecedented carnage around the world. As the early stage of the Covid crisis began disrupting tourism and export markets, Australia broke its 29-year run without a recession with a 0.3 quarter contraction to March and much worse is expected to come.
In the UK, GDP is estimated to have contracted 19.1% in the three months to May. US quarterly figures to June showed economic activity declined 9.5%, a cataclysmic drop the New York Times noted was likely only matched in modern history by the aftermath of post World War II demobilisation or during the depths of the Great Depression.
Not that the present is all well, and there are significant and unresolved challenges to face up in the second half of the year. ANZ chairman Sir John Key, at a summit to stock-take the Auckland economy earlier this week, says the bustle of activity in used car lots and restaurants has done much to bolster public confidence.
“Things seem pretty good. But is it really?” he asked the crowd of business leaders.
Hours after Key spoke Statistics NZ released its shock-inducing unemployment data. While the headline rate was rosy, the underutilisation rate measuring shifts from full-time to part-time work as businesses cut back hours, had a record rise to 12% and suggested much of the workforce is in a precarious position.
“We are in the early part of what is going to be a significant contraction in the New Zealand and global economy,” Key said.
The former prime minister noted the economy of the new normal – even if it returns to operating at full capacity – will inevitably be smaller than the old. The loss of international tourism, accounting for around 5% of the economy, alone will likely trigger a downturn on par with the Global Financial Crisis. This shearing from the economy will be most keenly felt in summer, the traditional bumper months for the international tourist trade, rather than the present shoulder season bolstered by locals redirecting their foreign holiday funds domestically.
Finance minister Grant Robertson concedes there are still significant challenges ahead, but the outlook has improved immeasurably from April and May. He points to relative figures showing New Zealand is now ranked in the top 10 of the positive end for employment and unemployment levels.
“Things are back up and running, and this is the head start we’ve got against the rest of the world,” Robertson says. “I’ve often said forecasting is more of an art than a science: And [the divergence between forecasts and outcomes] we’re seeing now is because we’re in the face of a one-in-100-year shock to the economy.”
With the wage subsidy extensions – covering the most vulnerable sectors of the economy and covering several hundred thousand workers – due to soon expire, the next quarterly unemployment figures will likely prove the real test of how well New Zealand is weathering this storm.
“Obviously, though, everyone has projected the September quarter would be the one where we see the peak of unemployment. We’ve still got that to come,” Robertson says.
National Party finance spokesperson Paul Goldsmith thinks the unemployment figures are misleading. “They’re totally masked by the wage subsidy,” he says. He acknowledges the subsidy was – and is – supported by National, but says work is needed to build capacity in the private sector to make up for the gaping jobs chasm opening up as international tourism and education markets remain effectively closed for the medium term.
“There is no question it’s going to get substantially worse, the question is how much worse. The critical thing is to have a plan for a return to an economy that’s creating jobs – and recognising the scale of the stimulus we’ve had,” Goldsmith says.
With an election just around the corner, Robertson may have one eye on the economy but has the other on the ballot box. He notes National has already ear-marked half of his $14b Covid rainy day fund for roading projects.
Stephens said the wage subsidy scheme had been “stunningly successful” in maintaining employment linkages, and New Zealand’s key export markets in Asia have avoided the worst of the Covid fallout and kept commodity prices high.
“It’s no bed of roses, but right now the economy is better than anyone expected. The most interesting thing is the radically different experience of the US and New Zealand – quite frankly we have managed this infinitely better on all fronts,” he says.
Even Zollner, the bear of ANZ, points to Australia where Melbourne faces the fresh hell of a second hard lockdown, and says New Zealand is “the new lucky country”.
“Even though we’re predicting a recession – and quite a nasty one – we’re the only country-sized economy, as opposed to tiny islands, to have eradicated the virus and escaped the worst.”
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