BNZ has become the first major bank to predict a recession, forecasting that the economy will shrink in the first half of the year.

The bank said this morning that a "best-case scenario" was that the economy would grow "a smidgen above zero" but the downside risks were growing by the day.

"We are thus now formally forecasting at least two quarters of negative growth."

READ MORE:
BNZ warns combination of drought and coronavirus create 'plausible' risk of recession
Employers push for direct support for businesses worst affected by coronavirus
Oil shock: Coronavirus crash deepens as oil giants wage price war
Mark Lister: Options for coronavirus-hit investments

Advertisement

In February the bank was the first to highlight the rising risk of recession, due to the combination of the impact of the virus and a growing drought across the North Island.

BNZ is still expecting the recession to be a very short and shallow one, with growth resuming and continuing in the second half of the year.

"This downturn is fundamentally a supply shock which, in turn, is creating a demand shock. Its root cause is Covid-19 so how the behaviour of individuals, globally, to this shock evolves will ultimately determine the economic path from here on in. Policymakers can only hope to smooth the process," BNZ head of research Stephen Toplis said on Monday.

Finance Minister Grant Robertson is set to announce more measures to assist businesses hit by Covid-19 this afternoon, as economists issue grim warnings. Photo / Mark Mitchell.
Finance Minister Grant Robertson is set to announce more measures to assist businesses hit by Covid-19 this afternoon, as economists issue grim warnings. Photo / Mark Mitchell.

The prediction came as other banks predicted interest rate cuts this month.

Kiwibank expects the Reserve Bank will cut the official cash rate by 50 basis points on March 25, which BNZ agreed was now likely.

ANZ, which predicted a 50 point cut a week ago hinted there was still a chance that the benchmark rate would be cut before March 25, suggesting the Reserve Bank may have an emergency meeting of the monetary policy committee.

ANZ chief economist Sharon Zollner called for a swift response from the Government.

"The risk that unconventional monetary policy will be required is lifting. And it's time for the Government to up the ante on fiscal policy. The good news is that there is plenty of firepower to do this. Scrapping this year's minimum wage rise seems like a no-brainer given pressure on businesses, and there are plenty of other short‑ and long-term policy options that could help."

Advertisement

On Sunday evening, in an interview on Q&A, Zollner was asked what she would say if she had the ear of the Minister of Finance.

"Good luck," Zollner said.

"It's a very difficult shock to manage because it's unlike any shock that we've seen before," she added.

Meanwhile, the flight to safety among investors continued, sending government bond rates tumbling.

The yield on 10-year New Zealand Government bond plunged to an all-time low of 0.83 per cent on Monday afternoon.

Focus Live: Oil prices have plunged amid coronavirus market slowdowns but when will we be saving at the pump? Video / AP

It was another day of selling on equity markets, with the NZX-50 down more than 3 per cent at 3:30pm.

Advertisement

"Investors are swarming to the safety of highly rated government bonds and central banks are pledging to use 'all appropriate policy tools' to support economic health," economists at Kiwibank said today.

The drop in the bond rate is a sign of concern about the future path for the economy, but also lowers the cost of borrowing for the Government.

At 4pm the Minister of Finance is expected to announce new measures to help businesses hit by the hit of Covid-19.