Unemployment is likely to climb above 10 per cent in the coming months, but the true health of the job market may be masked by the Government's wage subsidy, Finance Minister Grant Robertson has warned.
Today Treasury will publish fresh materials on its thinking of how the disruption caused by Covid-19 could hit New Zealand's job market and economic growth.
In an interview with the Herald, Robertson appeared to firm expectations that unemployment would rise into the double digits and that predictions the economy could shrink by more than 15 per cent were "in the ballpark of where we are".
Currently New Zealand has an unemployment rate of 4 per cent, or 111,000. Unemployment at 10 per cent would imply the number unemployed would more than double to around 275,000.
Robertson said the true state of unemployment could be masked by a wage subsidy scheme which has seen the wages around half of New Zealand's workforce subsidised by the taxpayer, but would eventually come to an end.
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"I think the low double digits is where we're going to be in the near-ish term," Robertson said of the unemployment rate.
"That, however, needs to be seen alongside the fact that 1.3 million New Zealanders are receiving the wage subsidy.
"We deliberately constructed that subsidy to keep people attached to their employers, and we hope that as we hopefully move out ... the level four phase, that we are in a position to be able to say that that's worked, and they can carry on in their jobs.
"But there may also be some for whom they won't and therefore the wage subsidy scheme potentially masks some people who end up out of work."
Robertson said "the wage subsidy scheme may be masking some longer term increases in unemployment [although] that could be balanced out by the fact that we've got other initiatives that we're undertaking" which could create jobs.
During the Global Financial Crisis, unemployment in New Zealand peaked at 6.7 per cent. In the early 1990s unemployment peaked at 11.2 per cent. A smaller workforce mean the total number unemployed peaked at around 182,000.
Economists have warned that because of the way unemployment is measured there was considerable uncertainty.
Even prior to Covid-19 there had been an increase in the number which were classed as on benefits but not in the labour force, so therefore were not classed as unemployed.
Drop in activity 'never seen before'
On Thursday Treasury published a statement warning that while there was considerable uncertainty about how exactly Covid-19 would impact activity "it is becoming more likely that New Zealand will see a deeper economic contraction in the June quarter than we have seen in our recorded history".
Some sectors would bounce back "quickly" once restrictions were lifted.
"Some though, including those exposed to international markets will take longer, possibly years, to recover. The recovery will also depend on the ability of the governments of our trading partners to limit the spread of the virus and restore the confidence in their economic outlook."
Typically recessions in New Zealand saw activity decline by less than 5 per cent from the recent peak, with the economy taking 2-3 years to reach the size it was before the recession, however measures to combat Covid-19 "will curtail activity more acutely than we have seen in the past".
Robertson said activity had fallen sharply.
"It's obviously significantly reduced. You can see that by looking at the publicly available data around movements and journeys into cities and around New Zealand. You can see that by the number of businesses that have suspended their operations. So it is a significant disruption in activity," Robertson said.
"The expectations that you've heard from the bank economists and independent economists of that sort of 15-17 per cent drop in activity in the June quarter is in the ballpark of where we are," he added.
"We'll be able to put some more data around that out next week, but there is a significant drop off in activity in New Zealand today."
In the coming months, the response of different Governments to Covid-19 are likely to face scrutiny and comparison.
New Zealand's lockdown is considerably more restrictive than that of Australia, especially in certain states.
Robertson acknowledged that New Zealand had put in place more restrictive measures than other countries but he was confident the Government's decisions were sound.
"I'll leave history to judge that, but I'm very confident in the decision we made. Every country's going to have its own circumstances, and in Australia you've got the federal/state issue, where you've got slightly different approaches taken in every state, let alone the ones taken at a Federal level. But I do believe we've gone hard and we've gone early.
"There was that statistic around where we got to a level four restriction versus the number of days since the first infection and we were by far the shortest," Robertson said.
"I think that's a sign that we went early, we definitely went hard … we've put in place measures to cushion the blow [to the economy], but I stand behind the logic that from both a health and economy point of view, getting on top of it in a shorter period is much better than a much longer period of lockdown than you're going to see in some other countries."
He had seen few reports that companies in other countries were using the lockdown to take market share off New Zealand companies.
"Not so much. Obviously I've seen the reports about offshore online retailers, but I think New Zealand's taken its stance for a reason and the short, medium long term outcomes will be better for New Zealand from a health and economic perspective from what we've done, even if there's been some exploitation of the situation by some offshore online retailers."