The bottom line is that every time lockdown measures are reimposed, the underlying state of the economy will weaken further because of it, the firepower and in some cases efficacy of fiscal and monetary policy will diminish, and more stimulus will be required.
The example of Melbourne shows why hesitating for these reasons is a bad idea, but the costs are real.
The good news is that renewed lockdown measures are looking like they could be far shorter, and the paralysis of Level 4 looks set to be avoided. And despite all the gloom, there are also a few positive developments to incorporate into the outlook.
- The economy rebounded vigorously out of lockdown 1, which gave some businesses a chance to start rebuilding their balance sheets earlier than expected.
- Housing market activity has also picked up, and prices have been resilient overall. However, we do expect the housing market to moderate as the income shock broadens. We’ll have more to say in our upcoming Property Focus.
- The RBNZ delivered more stimulus than we were expecting in the August MPS, and we think more is on the cards, with a further increase in the LSAP, and a negative OCR in April next year. While a negative OCR is not without risks, the lower NZD and flatter yield curve that’s likely to accompany it will be helpful for recovery.
Forecasting in the current environment is riddled with challenges, the likes of which we have never experienced. Uncertainty is extreme, and typical economic relationships cannot be relied upon to hold – at least in the near term.
We need to account for a number of factors, such as pent-up demand dynamics out of lockdown, the varying impacts of a closed border at different times of the year, temporary income support measures, efficacy of the policy response more broadly, the varying impacts of the initial shock by region and industry, virus developments, and how the economic shock will broaden over time.
Further, renewed lockdown measures are likely to keep the data flow noisy for longer. And even if we pulled off a miracle and managed to forecast everything perfectly, there’s no guarantee that Stats NZ will be able to measure exactly what’s going on out there. They face significant challenges too.
But hey, let’s have a crack.