COVID-19 and the economic path ahead – key takeouts

The economy is going into a deep but short-lived contraction. It’s going to be painful, but it is entirely necessary to avoid even worse health and economic outcomes further down the track. No one knows how deep the hole is or precisely how long it will take the economy to recover. But, the important point is that the economy WILL recover.

The response by NZ’s policy makers has been timely, and appropriately aggressive. The fallout on NZ’s labour market, housing market and economy more generally will be limited greatly by the decisive actions we’ve seen to date. We’re confident they will work to support the economy as we endure the lockdown, and then stimulate the economy as we emerge.

It gives us the best chance of emerging from this crisis in reasonable shape compared to some. But how the rest of the world fares in this still matters a great deal for us, given NZ remains a trade-dependent economy. It’s a well-worn cliché, but it’s true that we’re all in this together.

There will be sectoral, regional, and employment differences. Humans are incredibly adaptive and will find new ways of working, but this will be easier said than done for many. COVID-19 is a viral outbreak, and sectors that rely on person-to-person contact and the movement of people will face greater challenges. Providing that the Chinese economy manages to recover from its winter flu, prospects for NZ food exporters may not be as bad as they could be given the pending global downturn. Our Terms of Trade should hold up reasonably well, but we acknowledge the downside risks around this view.

NZ has more fiscal and monetary ammunition (than most). And policymakers have already shown boldly that they are not afraid to use it.

Don’t pay too much attention to point forecasts. Forecasting is tough at the best of times, borderline impossible now. The relevance of forecasts is also reduced in an environment where some firms are simply trying to stay afloat rather than doing any sort of planning for the future. We outline our updated outlook below and encourage you to focus on the story and risk profile, rather than the numbers.

Businesses on the front line of this shock will have the clearest sense of the impacts, and are thus best placed to figure out the way forward. Kiwis have proven themselves to be resilient and innovative. These qualities stand us in good stead as we tackle this thing.

Carpe (28) diem. Essential industries and businesses that are able to function during the lockdown will learn a lot about new work techniques. Others have time to plan for the future. Make the most of this unusual opportunity.

There is plenty of help out there from government and banks. Seek it out and encourage others to make use of it. Help others get through if there are things you can do that will make a difference.

Co-operation and caring matters. If we all pull together, follow official advice and look out for each other, it will be easier to get through this. Kia Kaha New Zealand.

Market Recap

Concerns over the impact of COVID-19 on the global economy and effective actions by global policymakers combined last week to push NZ and global yields lower, with yield curves also flattening. Global longer-term yields fell last week (US Treasury 10Y 0.67%, Australian/NZ 10Y government bond 0.89%, 1.09% respectively), with investors on edge over the impact of COVID-19 on the global economy.

Global central banks have progressively upped the ante. Last Monday, the RBNZ announced a $30bn government bond purchase programme, which has contributed to the sizeable fall in government bond (and swap) yields over the past week. The US Federal Open Market Committee (FOMC) further stepped up its Quantitative Easing (QE), pledging to purchase an unlimited amount of US Treasuries and mortgage-backed securities. The Federal Reserve’s balance sheet has soared to over USD5trillion for the first time on record. The European Central Bank, Bank of England and Reserve Bank of Australia have also moved to relax limits or increase their QE programmes.

Policymakers have also pulled out most of the stops to provide liquidity. This morning the RBNZ announced another tool to support liquidity in the corporate sector, and put in place other measures to support monetary policy implementation and to keep financial markets functioning. Swap, credit and corporate bond spreads have narrowed since central bank actions were unveiled. We suspect more measures will be unveiled soon, if strains in liquidity and credit markets resurface.

ANZ has already released provisional results for the March survey on March 10th. Unsurprisingly, business confidence fell in March, to levels not seen since the 2008 Global Financial Crisis. This fall was led by a plunge in export intentions, to a record low. While the full results for March will be welcome, few of the responses are likely to have been received after it was announced on March 23 that NZ would go into lock down. As such, we would expect further deterioration in readings from this survey in the coming months.