Liam Dann: Lockdown call signals longer grind for economy

OPINION:

Some sort of strategic change was inevitable after the spread of Delta in the past week.

Today’s moves suggest the Government has recognised issues of mental health and social cohesion require attention now that hopes for returningto a zero-Covid nation have faded.

But while the shift in policy, away from elimination and towards a gradual reopening, brings more freedom for families it offers no fresh hope for the business community.

Retailers and hospitality firms remain locked at level 3 for at least a week or two, but with the added concern that a sharp V-shaped economic recovery now looks less likely.

On that basis BNZ economist Stephen Toplis is revising his economic outlook downwards and warned of a tougher Christmas retail period ahead.

If there is a bright spot in there it is that the numbers do not fall off a cliff.

The economy will continue to grow off third-quarter lockdown lows even as we face the threat of increasing Covid levels in the community.

But that extra layer of health risk and caution will mean a tougher, slower grind than the Covid-free boom we experienced last year.

“New Zealand has well and truly passed the point where it can live in the hope of operating in a Covid-free bubble,” says Toplis, BNZ head of research.

“Now we are moving rapidly towards living with the disease, accepting that there will be a significant increase in hospitalisations and, unfortunately, deaths.”

Writing in advance of the 4pm announcement, Toplis said he expected to see”a step in the direction of getting rid of the levels terminology altogether.

“Policy moving forward is likely to be far more pragmatic, and a lot less rules-based, as the Government progressively transitions New Zealand into a Covid-endemic world.”

But regardless of the details the BNZ team would be looking to lower fourth quarter
GDP forecasts over the next few days, he said.

The bounceback in the fourth quarter was now more likely to be around 6 per cent – rather than the previously forecast 7 per cent, he said.

New Zealand’s longer-term economic growth trajectory would also now need to be re-evaluated, Toplis said.

“Our current forecasts implicitly assume the economy operates in a relatively Covid-free manner from mid-November onwards.

“This no longer looks to be the case. Either way we will be more restricted than we are currently assuming, or the spread of Covid in the community will be adversely
impacting consumer spending, especially in the services sector, as folk fearing Covid go out less.”

Toplis retained some optimism for the hospitality sector, looking forward to reopening in time for the festive season.

“There is every reason to be optimistic. However, we strongly caution there is a very real risk the Christmas bonanza will be nowhere near as rewarding as it would
have been in a ‘normal’ holiday season.”

Auckland Business Chamber CEO, Michael Barnett expressed his disappointment at the lack of movement for business and called for more government support.

“Extension of the wage subsidy for employees and the resurgence payment for employers to only partially offset weekly overheads does not cut it,” he said.

ASB chief economist Nick Tuffley also suggested more business support would be needed.

“Providing added financial support for businesses would be prudent to give businesses some further means to survive until they are able to trade with more freedom,” he said.

Bank economists are sticking with expectations that the Reserve Bank will hike the Official Cash Rate on Wednesday.

But the BNZ downgraded the probability to 85 per cent from 100 per cent “in recognition of the issues being confronted”.

“Ironically, as we all demand greater and greater clarity about the way ahead, the truth of
the matter is that we are entering a period of heightened uncertainty and experimentation,” Toplis said.

“Uncertainty is never great for business planning especially around investment activity.”

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