Covid 19 coronavirus: NZ economy set to contract by 6 per cent in 2020 - ASB, ANZ Bank

Two major banks expect New Zealand's gross domestic product (GDP) to contract by about six per cent this year as a result of the coronavirus pandemic.

ASB Bank expects Covid-19 to deliver a "sizeable cumulative hit" to GDP on the basis that not all the activity deferred during the current four-week lock down will be brought back on stream.

A senior economist at the bank, Mark Smith, said the economy was heading for a deep, but short-lived, contraction.

"We assume Covid-19 will cause the economy to shrink by around 6 per cent of GDP over 2020, considerably above the sub 3 per cent cumulative falls to NZ production-based GDP in the early 1990s downturn and the Global Financial Crisis," Smith said in a report.

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"There is the likelihood that New Zealand will experience one, perhaps two quarters of negative growth as opposed to the six quarters of negative growth in both the previous large downturns," Smith said.

ANZ was last week forecasting a 3 to 4 per cent contraction but now expects a 5 to 6 per cent fall.

"We now have some degree of (Covid-19) community transmission, and our updated forecasts reflect the fact that New Zealand will be in lockdown for at least four weeks," ANZ said.

"We now expect GDP to fall by 5-6 per cent over 2020, but the drop is now heavily front-loaded into Q2.

"And activity at the end of the year under these forecasts is running about 8 per cent below the previous trend seen at the end of last year," ANZ said.

• Covid19.govt.nz: The Government's official Covid-19 advisory website

ASB's Smith said that while the economy faced considerable economic challenges, much would depend on the duration of the shutdown.

"It will crucially depend on the length the shutdown, the portion of the economy that will be impacted and the extent to which activity in affected areas will be disrupted," he said.

"These are still unknown and there could be a range of potential outcomes," Smith said.

"However, it seems more likely than not that quarterly movements in New Zealand GDP will be massive - but hopefully short-lived- with easily the greatest quarterly volatility seen on record."

Smith said he expected the subsequent recovery to be gradual, with widespread caution evident and the focus on safety and saving rather than a sudden release of the spending shackles.

"Eventually we expect the economy to recover, but it won't be until late 2022 that NZ economic activity is above late-2019 levels.

Smith said the Reserve Bank's official cash rate, currently set at 0.25 per cent, is unlikely to move higher until 2024.

"In short, we do not expect the economy to rediscover its mojo for a lengthy period, with the level of economy-wide GDP expected to remain below pre-crisis levels until late 2022," he said.

Smith expects unemployment to hover at around 7 per cent over 2020, and may start to drift lower by 2022.

At the start of the year, ASB was expecting 2020 to be a very good one for the domestic housing market.

Now it expects nationwide house prices to be around 5-6 per cent below their likely March 2020 peak.