Our take on the latest Economic and fiscal update (Thu 14 May 2020)
An additional $50b in stimulus
Employment, education, and construction the focus
Still an overly optimistic view of recovery
The key numbers...
- The government has responded to the COVID-19 pandemic and economic downturn with the most comprehensive investment package New Zealand has even seen, with a massive crisis calling for equally massive stimulus.
- The COVID-19 Response and Recovery Fund, worth $50b over four years, provides funding for a comprehensive suite of policies designed to both weather the current economic chaos and also start rebuilding the economy.
- Employment remains a key focus and is supported by an announcement of a wage subsidy extension worth $3.2b, with the extension requiring a higher revenue loss to qualify for assistance.
- Retraining those who face unemployment is also provided for, with additional investment in training programmes totalling $1.6b in additional spending.
- Additional construction spending was also announced, with a commitment to build 8,000 more state houses, on top of the 6,400 already expected, alongside $3b in infrastructure spending.
- Treasury expects unemployment and economic activity to return to current levels by the end of 2022.
Treasury economic forecasts
Nominal GDP, $b, annual totals
...and our reaction
- The government’s investment is wide ranging and substantial, which will help limit the current downturn in the New Zealand economy and contribute towards a faster recovery.
- However, we remain sceptical about the overly optimistic view from Treasury that the economy can return to normal levels of operation within two years. We prefer the “Slower Recovery” forecast track, which we expect better reflects the structural economic changes that the economy will be forced to undergo.
- The initial infrastructure investment announced is far too small to make a dent in the infrastructure needs that New Zealand has. Further announcements will be necessary to bolster construction activity and employment.
- The government’s state housing announcement aligns with our view that additional public housing investment is warranted to provide economic and social support.
- The remaining funding available to the government provides options to retool the economy and invigorate confidence. It will be important that structural changes are identified and supported, without the government picking winners and losers among industries or individual businesses.
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