Signs are emerging that the economic hit from Covid-19 might not be as bad as expected, although what actually happens from slamming the brakes on activity both at home and abroad remains uncertain.

"From the outset of this pandemic, our government has committed to going hard and going early, cushioning the blow for households and businesses, and kick-starting the recovery on the other side," Finance Minister Grant Robertson told Parliament this week.

It may be working.

The massive $62.1 billion of fiscal stimulus and the Reserve Bank's $60 billion near-zero interest rate policy and quantitative easing programme, combined with a much quicker return to normality, is helping cushion the blow and economists are starting to dial back their dire warnings.

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First out of the gate was Westpac Bank.

"Our forecast was that the economy would settle 6 percent below the pre-Covid level after the lockdown was lifted. But some recent data is tentatively suggesting that the economic situation may not be quite as severe as that," said chief economist Dominick Stephens.

Breaking out the plastic

Retail spending, which tanked when the country was in full lockdown mode, is now down only 2 percent on the year. "That is a faster recovery than we were expecting and points to an encouraging degree of resilience in households' spending appetites," he said.

While several economists argue this is simply "pent up demand," that increased activity is bedding in and anecdotal evidence supports Stephens. Farmers on Lambton Quay ran out of bags on Wednesday and "it's been busier than Christmas," a clerk said.

Also, the pace of job losses has slowed in recent weeks, "suggesting the labour market has been more resilient than we expected," Stephens added.

In early April – when the country was under full lockdown – the number of working age people receiving a main benefit was rising as much as 7,000 a week. In the week to May 22, that slowed to just 486.

Overall, the number of people seeking the jobseeker benefit has climbed by more than 40,000 since just before the lockdown, but that was more modest than Westpac expected.

Stephens noted that is largely because the wage subsidy scheme kept many people employed. "However, it looks like unemployment may not rise quite as high as our forecast of 9.5 percent," he said.

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Data today showed new job ads posted on Seek NZ during the fortnight ended May 31 were up 92.7 percent compared to the April 2020 average. The consumer services sector showed an increase of 175 percent in the last two weeks compared to the April average, and made up 22 percent of the total new jobs advertised on Seek.

That sector includes hospitality and tourism.

No new cases

Bank of New Zealand head of research Stephen Toplis noted more than a week with zero new Covid cases, and just a solitary active case, gives obvious grounds for optimism. So too does the gradual easing of previous restrictions.

Importantly, the shift to alert level 1 occurring sooner than forecast has changed the panorama. "While it will still take years for GDP to return to pre-Covid levels, our forecasts now show this will occur in the second half of 2022 versus a prior forecast of the fourth quarter of 2023," Toplis said.

It could even be faster as his forecast doesn't include an opening of the trans-Tasman border this year. Prime Minister Jacinda Arden has said a September opening is realistic.

"An opening up on a September timetable represents some upside risk to our current projections," said Toplis.

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Air travel between the two nations would offer a massive boost to New Zealand's tourism sector. There were 1.5 million visitor arrivals from Australia in the September 2019 year and those visitors spent about $2.8 billion.

ANZ Bank chief economist Sharon Zollner - who has been one of the more pessimistic forecasters - also said New Zealand's success in stopping Covid-19 has been a plus.

"I do see the risks around our forecasts as having tilted from the downside to the upside over the last month but it's purely because of our unexpectedly fast success in beating back Covid-19," she said.

However, while there are welcome signs of a bounce in activity "don't be fooled; while the disruption is easing, the recession is just beginning," she warned.

Encouraging signs

Kiwibank's Jeremy Couchman also said he has been encouraged by recent data flow, including Kiwibank's own card transactions data, which have shown a strong rebound in local spending as social distancing measures have eased.

"For the first time in a long time, upside risks to the economic outlook are starting to look plausible," he said.

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ASB Bank's senior economist Jane Turner said "yes, we are excited that we are seeing a slightly faster recovery, which may result in a fractionally smaller decline in Q2 GDP than we initially forecast. Also heading into Level 1 much sooner than expected. So yes, at the margin this is good news."

She warned, however, "let's not get carried away."

The situation remains dire for major trading partners and "I still see the growth risks to the global economy as skewed to the downside."

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However, for New Zealand's biggest trading partner – China – there has also been good news of late.

A private gauge of China's service sector activity rebounded sharply to a nearly 10-year high in May as domestic demand recovered. The Caixin China services purchasing managers index rose to 55.0 in May from 44.4 in April, Caixin Media Co. and research firm Markit said.

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Australian slowdown

In Australia – NZ's second largest trading partner – gross domestic product shrank 0.3 percent in the March quarter.

"It's still a technical recession with the second quarter in lockdown, but compared with the US, Europe and China, Australia has the smallest contraction by far thanks to prompt government support and strong trade," said independent economist Annette Beacher.

Reserve Bank of Australia governor Philip Lowe is also more optimistic of late about Australia's recovery. "It is possible that the depth of the downturn will be less than earlier expected," he said this week.

Following the May monetary policy statement, RBNZ assistant governor Christian Hawkesby said "there are upsides" but it "takes time to make a judgement" and "some areas of pent up demand as restrictions lift will provide a bounce."

Equity markets, meanwhile, indicate investors are already pricing in a more optimistic recovery with Wall Street fast approaching its pre-Covid levels and the S&P/NZX 50 Index now down only 2.2 percent since the beginning of the year.

"New Zealand equity performance was broadly positive in May and volatility has decreased compared with recent months, with 34 of the NZX 50 stocks registering positive returns on the month," said Jarden analyst Arie Dekker.

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The kiwi dollar, which hit a 10-year low of 54.68 US cents on March 19, is also benefiting from the rising appetite for riskier assets. The kiwi recently traded at 64.13 US cents.

"NZ's effective elimination of Covid-19 from the country must be acknowledged. This has led to a much faster easing of government-imposed restrictions than imagined even a month ago," said BNZ strategist Jason Wong.

"By mid-next week, it is likely that the only remaining restriction will be on international inbound travel."

Importantly, it allows an "earlier, more significant recovery in the NZ economy," which takes the pressure off domestic monetary policy, reducing the chance of the RBNZ taking the official cash rate negative next year and paving the way for a scaled-down quantitative easing programme, he said.