New Zealand's economy has bounced back from Covid-19 more quickly than expected, suggesting unemployment will end up lower than feared even though the global economy is deteriorating.
On Friday the Treasury put out the latest economic update, which broadly said New Zealand's domestic economy is doing better than was forecast in May's Budget, while the outlook for the global economy "is considerably worse".
Treasury pointed to a pick-up in electronic card transaction, new car registrations, housing market data and signs the labour market was "stabilising", with smaller increases in those taking the Jobseeker Support than earlier in the lockdown.
While the economy is still expected to take a massive hit in the three months to June 30, it may not be as bad as what was forecast in the Budget in May.
"Overall, incoming data are moving in a direction that suggests the contraction in the June quarter may not be as severe as expected in the [Budget]," Treasury said today.
Earlier in the year Treasury's put out a range of scenario's, the best of which had unemployment peaking at just under 10 per cent, but possibly climbing much higher. The outlook now is considerably lower.
"Our most recent estimate is for the unemployment rate to rise to around 7.5 per cent in the June quarter, and to peak at about 9 per cent in the September quarter, down from 10 per cent in the Budget."
Finance Minister Grant Robertson said the Treasury statement's squared with what he was hearing from businesses.
"The feedback I'm getting from the business community is it's better than expected, but still challenging," Robertson told the Herald.
"We're seeing that activity in the economy ... [was] by and large coming back to pre-Covid levels at a quicker timeframe than had been originally used in their scenarios."
Treasury said the improvement it was seeing was "welcome" but warned that the Government should be cautious about assuming the recent drivers would continue.
Some of the pick-up might simply be pent-up demand from the lockdown, and the end of the wage subsidy could have an impact.
"There is a very considerable fiscal policy stimulus supporting employment and businesses across the economy."
The real level of unemployment would not be known for some time, and would certainly continue to rise.
"We continue to expect unemployment to rise considerably this year and anticipate that it will remain above its pre-pandemic level for some time, which will weigh on household income and spending."
Part of the boost to the economy it was anticipating was because of higher Government spending, but the impact of the spending was small.
Since the Budget, there had been $6 billion in spending decisions for both the coming year and the medium term, Treasury said.
"We estimate that the increase in fiscal support in 2021 raises real [gross domestic product] by about one-quarter of one percentage point relative to our [Budget] forecasts," Treasury said.
Earlier, National's finance spokesman Paul Goldsmith said New Zealand was spending more on the Covid-19 recovery than most of its peers, but the hit was among the largest.
"If this spending doesn't deliver higher growth, which so far appears to be the case, then it will have to be paid back with higher taxes on future generations," Goldsmith said.
Treasury warned that while the domestic economy looked better than it had expected, the outlook for the global economy was getting worse.
The IMF and OECD have both cut global growth forecasts, suggesting the hit to New Zealand's main trading partners could be far larger than expected.