The three reasons Covid couldn’t tank the Kiwi economy – ASB report

A new report ASB highlights three reasons why the economy defied expectations, and breaks down that resilience by industry sector.

This time last year it looked like the pandemic’s impact on the New Zealand economy “would be sizeable and long lasting”, said ASB senior economist Mark Smith.

ASB’s own forecasts were that the economy would shrink by 7 per cent through 2020 and wouldn’t get back to pre-Covid levels until 2023.

Smith, who described forecasting in the pandemic as “down right impossible”,conceded it was sometimes good to be proven wrong.

“The gloomy predictions have yet to arrive,” he said.

Instead, New Zealand’s GDP contracted by just 1 per cent over 2020 (close to 3 per cent over the calendar year) and the economy ended with more jobs than it had pre-Covid.

“As we had expected, the hardest-hit sectors were those that have been directly impacted by the tighter border requirements and focus on physical distancing, and firms also trimming some discretionary expenditures,” he said.

“Conditions in the transport, advertising, hospitality and arts and other services sectors
look to have been particularly tough.”

But surprisingly of the 16 industry sectors monitored by ASB, economic activity was
below pre-Covid levels in only seven (which together account for about one third of GDP).

Employment in just eight sectors (just under half of total employment) was below pre-Covid levels by the end of 2020.

Three reasons for success:

Flexibility

Essentially the ability of businesses and individuals to adapt new pandemic conditions was stronger than most economists expected.

“The economy was able to roll with the Covid-19 punches, absorb the lockdown disruptions and make adjustments to future plans,” Smith said.

According to the 2020 Business Operations survey (BOS) conducted by Statistics
NZ, 84 per cent per cent of businesses made changes to their finances to respond to the impacts of Covid-19.

Forty per cent of businesses arranged rent reductions or deferment with their landlord.

Businesses that could utilise internet technology and employ remote working (around half of all businesses) tended to fare better, Smith said.

Firms were also able to reconfigure their businesses to the new operating environment, with almost two-thirds of businesses postponing or cancelling any planned new capital investment.

Half of businesses reduced work hours for existing staff, with one-quarter reducing salaries/wages.

But only 17 per cent of businesses laid-off staff, with 14 per cent actually hiring more staff.

Resources were also able to shift across sectors, with employment gains in some sectors (including construction and in the public sector) partly due to job losses and feweropportunities in other sectors.

Lockdown didn’t equal shutdown

More of us were essential and more firms stayed open during the lockdowns than might have initially been assumed, Smith said.

The BOS showed that almost half of the 47,000 NZ businesses employing six of more employees were classified as essential services during the Covid-19 pandemic response.

Almost one-third of these businesses were fully operational during alert level 4, while one-half were partially operational.

Once New Zealand changed to alert level 3, more businesses were able to open.

Larger firms tended to have proportionately more of their operations deemed to be essential (71 per cent for enterprises hiring more than 100 staff), much less so for smaller firms.

There were also differences by sector with proportionately fewer firms in the arts and recreation sector and in accommodation and food services able to stay open during higher alert levels.

More firms in the agricultural sectors and in finance/insurance were able to remain operational under lockdown conditions.

Policy action

With hindsight, the actions by the NZ Government to “go hard and go early” and to try and
eliminate Covid-19 in NZ looked to have been the right call, Smith said.

“Lockdowns in New Zealand were mercifully short compared to those overseas. Policy support has also played a key role.”

The bulk of the $50 billion Covid-19 Response and Recovery Fund (CRRF) has now been deployed.

The wage subsidy had also proved to be a master stroke, keeping people in jobs when
they would otherwise have been laid off.

“What’s more, this support was deployed throughout much of the business
community,” he said.

According to the BOS, around 77 per cent of businesses received government financial assistance in 2020, such as wage support and business loans.

The RBNZ also played a key role. The 0.25 per cent OCR, quantitative easing and other
measures kept the economy running and financial system ticking over.

What next

The economy is slowing and Smith acknowledges these figures may sugar coat things, with many firms now facing tough conditions.

ASB’s forecasts have little, if any growth in the New Zealand economy and employment over 2021.

But the economy could continue to surprise with its resilience, he said.

“Beyond what we expect will be a slow start to 2021, risks are increasingly skewed towards a stronger outlook for economic activity and employment.”

Sectors that bore the brunt of the Covid-19 hit in 2020 are expected to bounce back given the easing of border restrictions (including the transtasman bubble), the return to more typical work and leisure patterns, and the unleashing of further pent-up demand by firms and households.

Expected underperformers included those that had a good 2020 but were unlikely to do as well over 2021, he said

These reasons included growth-inhibiting capacity constraints and rising costs (construction), direct policy measures to slow residential property market buoyancy, the return of more normal work and leisure patterns and the fact that consumers have largely had their fill of consumer durables, he said.

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