New Zealand's economy faces a tougher time for the rest of this year but may be on track for a stronger 2021, according to international economic research agency Fitch Solutions.
Fitch Solutions has revised down its 2020 GDP growth forecast for New Zealand, from -1.4 per cent in 2020 to -4.5 per cent.
However, the agency now expects a stronger recovery in 2021, with growth of 6 per cent, from 4.1 previously.
Fitch Solutions is a unit of the group that includes Fitch Ratings - but it is independent and this economic report does not relate to New Zealand's credit rating.
The expected second half recovery in New Zealand's growth had been disrupted not only by the new Covid-19 lockdown measures but also a new wave of infections elsewhere in the world, the Fitch Solutions Country Risk and Industry Research report said.
The report also highlighted the rise of new cases in Australia as another headwind, likely delaying any travel bubble to "jump start tourism" into 2021.
"As such the country's large tourism sector will remain under pressure this year."
The increasing grim global situation will also weigh on New Zealand export returns this year, Fitch said.
"We expect net exports to drag headline growth down by 0.7 per cent. This is due to a larger forecast contraction in exports (-8.0 per cent) than imports (-5.0 per cent)," Fitch says.
"The severe impact that the Covid-19 pandemic will have on the global economy,
which we expect to contract by close to 4 per cent this year, drives our bearish view on exports."
Fitch says the healthier recovery for 2021 is due to "a combination of improved external factors, especially as China returns to trends growth, and pent up domestic demand that will bolster economic activity".
Imports will fall in line with weaker domestic demand.
"New Zealand's exports will experience a delayed recovery on the back of China's
growth. While we see China's growth to return to trend by the end of the year, we remain cautious of Chinese domestic demand strengthening robustly."
Fitch warned that given that New Zealand's key exports to China – our largest trading partner – are mainly consumer goods "demand for these may not accelerate in line with overall Chinese growth this year".
There was also a sobering reminder that risks to growth forecasts "remain tilted to the downside" while the current resurgence remains live.
"While the resurgence of Covid-19 remains low in terms of scale, there are concerns around how the new infections were contracted in the first place," Fitch says.
If confinement measures return to being severe and more prolonged, "this would plunge growth further into negative territory".
Meanwhile, financial services group AMP Capital is forecasting investment markets will remain strong into 2021 but raises concerns about the longer term outlook.
In its latest Quarterly Strategic Outlook, AMP Capital warns of expecting a V shaped recovery where the economy bounces back directly to pre-Covid levels.
"There are two concerns with expecting a recovery that sees activity and labour markets return to where they were prior to the onset of the virus," said NZ managing director and chief economist Bevan Graham.
The first was the risk of a viral resurgence, he said.
This was already playing out in the United States and Australia, leading to a
slower pace of recovery. In New Zealand the new outbreak also served "to illustrate the fragility of the environment, even when community transmission appears to have been eliminated".
The second concern was that "a large number of firms will not make it out the other side of the Covid recovery".
With that "collateral damage" from the shutdowns likely to problematic in the period ahead there are still risks that will push the markets periodically downwards he said.
On the positive side: "volatility and periodic downward market moves will restore additional value and prevent dangerous euphoria developing," said co-author and head of investment strategy Greg Fleming.
That meant that "the ultimate trend will be towards higher international equity markets into 2021," he said.
But longer term issues remain for investment markets, he warned.
The market rebound that we have seen so far may be sustained when the pandemic outlook improves and money moves out of panic-driven cash and government bond allocations, he said.
But there were still fundamental problems that remain to be properly addressed in equity capital markets.
"We may adopt short-term positioning to take advantage of beaten-down asset prices in general, but will take a cautious approach to the growth asset classes in subsequent quarters."