NZ on track for a 'V-shaped' recovery

by Ksenia Stepanova14 Jul 2020

New Zealand may be on track for a ‘V-shaped’ recovery as the downturn looks likely to fall on the “moderate end of expectations,” according to Westpac economists.

In its weekly commentary, Westpac says that some key economic indicators have performed better than expected, and provided the virus remains contained, New Zealand’s economy should be able to bounce back quickly. It is currently forecasting a 15% drop in GDP through the first half of the year, followed by a 14% bounce back in the September quarter.

Household spending has been a key area of strength, with spending on items other than groceries falling by 90% in April - however, as New Zealand moved down Alert Levels, Kiwis started giving their credit cards “a good workout,” and June spending rose by 8% on the same time last year.

Read more: ASB launches small business advice hub

The agricultural sector has also weathered the storm reasonably well, but service sector businesses have suffered with weak activity in the past few months - and with international tourists unlikely to return anytime soon, the drag on demand looks set to continue. On the positive side, Westpac says that job losses have been “more modest than expected,” with 60,000 New Zealanders on benefit since late March compared to the expected 100,000 predicted job losses.

When it comes to mortgage rates, Westpac says they’re not likely to drop much further this year.

“Fixed mortgage rates have fallen recently, but they may not drop much further in the near term,” the bank stated.

“The drop in mortgage rates this year is now roughly commensurate with the drop in wholesale rates.

“We are forecasting fairly stable interest rates this year, but early next year we expect that the RBNZ will lower the OCR to -0.5%. If that is correct, then both fixed and floating rates will fall next year.”

Read more: Experts expect negative OCR within next 12 months

Westpac says New Zealand’s economy still faces “significant challenges” over the coming months, but that the downturn will not be as tough as expected.

“Many businesses have been left with a hole in their earnings following the lockdown in late March and April,” Westpac noted.

“In addition, the combination of a weak global economy, the closure of our borders and increases in unemployment will be a significant drag on demand. Against this backdrop, we expect that GDP will remain below its pre-COVID trend for an extended period.

“However, given our success in limiting the spread of the virus and the signs of firmness in demand, it looks like the downturn in the New Zealand economy will not be as severe as we had previously feared.”

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