RBNZ chief economist Yuong Ha. Photo / Supplied
On the eve of one of the biggest monetary policy decisions the Reserve Bank has faced, news broke that Covid-19 was back in the community and Auckland was locking down.
But, with its focus firmly fixed on long-term recovery, the grim news of new community transmission didn't change the big call, says RBNZ chief economist Yuong Ha.
That call sees the RBNZ increase both the scale and timeframe of its quantitative easing programme - to an eye-watering upper limit of $100 billion, and out as far as June 2022.
"Obviously with the news late Tuesday night we just had to re-check that decision on Wednesday. We didn't really change it much at all," Ha told the Herald by video conference on Thursday.
"We knew, with eyes wide open, that the economic outlook ... it's going to be a long-haul recovery, with downside risks given the uncertainty."
Things had been getting better of course. Until this week the economic activity had been tracking ahead of expectations.
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"What we are looking at now is an economy [with a] starting point that's a little bit better than we thought back in May," Ha says.
"Having come out of lockdown we're learning that people are able to work from home more than we thought, the bounce back in spending once we came out of level 4 lockdown is a bit stronger than we thought."
That meant that the decline in GDP over the first half of the year was not as bad as had been thought, he says.
"But if we look over the medium term we think the recovery profile is challenging. Because [of] the border assumptions, international tourism and migration flows will be lower than we thought for longer."
The net result - even before you get to the latest lockdown - is "a more challenging picture" where it might take two to three years for GDP to recover to pre-Covid levels, he says.
The RBNZ expects unemployment will continue to rise - peaking around 8 per cent later on this year and then declining gradually over the next two to three years.
That's still a lower peak than some economists expect, but it factors in continued fiscal support from central government and monetary policy which will be geared to keep interest rates very low for a very long time.
And inflation will be low – below 1 per cent for one to two years, Ha says.
"Those are the broad-brush baseline scenarios we're working to, within that there will be ups and downs. But probably the risk is towards the downside.
"Things could be better than we assume. If we do manage to put in place some of these travel bubbles that … whether it's Australia or Cook Islands, that might be an upside to activity. But at the same time there are a lot of downsides associated with either long periods of lockdown or weaker economic growth with more virus transmission."
What about the impact of the latest lockdown?
ASB economists have estimated that having Auckland at level 3 and the rest of the country in level 2 costs the economy about $450 million - 0.15 per cent of GDP per week - per week.
The RBNZ hasn't yet done specific estimates on the costs of the current lockdown although it did publish some analysis in May about what various lockdown scenarios over various time frames might mean to national GDP.
GDP was estimated to be around 37 per cent lower during the period of alert level 4 than it would have been without any restrictions.
At level 3 it was about 17 per cent lower, level 2 was about 8.5 per cent and level 1 4-5 per cent.
This means a lockdown for one quarter, or three months, would reduce quarterly GDP by 37 per cent.
Over four and a half weeks that equates to $10b of lost production, reducing annual GDP by 3.2 per cent.
By comparison, a similar period of time at alert level 3 equates to a fall of around $5b in production relative to the same baseline, reducing annual GDP by 1.7 per cent.
The good news, says Ha, is those estimates were probably a bit on the high side.
"If anything those alert level impacts on GDP weren't as bad as we feared because people were able to work from home. So there was a bit more economic activity in play even after the various lockdowns," he says.
"That's sort of the rough working assumption we've got but of course every situation feels different."
On a regional basis we know that Auckland accounts for about a third of economic activity - does that translate to relative GDP lockdown impact of one third?
"We just don't know," Ha says.
Factors like business resilience and adaptability are highly intangible.
That said, the RBNZ does do a lot of work collecting feedback from across the full spectrum of New Zealand business.
"The picture is mixed," Ha says. "There is an underlying level of resilience … a lot of the policy support through wage subsidies, mortgage deferrals, those have all helped."
Whether those schemes will be extended in some shape or form now will make a difference to the final impact.
A big part of the economic equation is about confidence, he says.
"We just don't know how that's going to play out. It is going to be a challenging time for businesses and more so for those exposed to services, retail, tourism ... it's going to be a challenging time for the country."
Meanwhile expect interest rates to stay low for a long time. They may even go lower as the RBNZ deploys more tools.
"We're here for the long haul to help the recovery. We're doing our part to make interest rates lower for longer - that's the best contribution we can make to the economic wellbeing of NZ," he says. "We've got room to do more if we need to and we're actively preparing to use the tools."
The big one this week was the increase to QE.
"We create money … which is what central banks do. And have always done, but we then exchange it for assets but those sit on our balance sheet."
Those assets are the newly created government bonds, the liability is the cash that sits in the banking system.
"Eventually when the economy recovers and you don't need low interest rates anymore you can simply unwind … and we sell the assets back to the public. Interest rates will rise and we'll take back the cash and unwind it that way."
Lately there have been suggestions by some – including former PM Jim Bolger – that we could simply choose not to unwind the QE – effectively writing off Crown debt.
Ha, like most economists, is highly sceptical.
His first point is that the ball sits in the Government's court – not the central bank's.
"It's not our choice whether to pay it back or not, we're actually holding the asset … we expect those assets to be paid back. It is the Government's debt," he says.
"And I don't even think it would be a choice they'd even contemplate at this stage."
He has been asked the question a lot lately, he acknowledges.
"The perspective I'd offer is: there isn't a free lunch out there. There isn't an easy solution that we're missing," he says.
"The idea of writing off the debt would seem a very strange path. Those easy solutions don't exist in this current environment."
Meanwhile the existing tools are doing the job, he says.
"On QE we've bought $23b of bonds so far, so there is still a long way to go before we exhaust that."
That's been effective to keep rates low, he says.
"Beyond that we're working on other tools that might allow us to lower interest rates a bit further if we need to."
Next up is likely to be a combination of a lower - or negative – official cash rate and the "funding-for-lending programme" - which is another way for the RBNZ to directly lend to banks at low interest rates.
"So they can pass that on to their customers in the form of lower mortgage rates and business lending."
House prices will be 20% lower in real terms by the mid-2030s than in 2021.