Covid 19 coronavirus: Quick move to Level 2 can't head off economic slump

Level 2 rules will allow more activity, but until borders open the pain won't stop. Photo / 123RF

If New Zealand comes out of alert level 3 and opens the economy next week it will put us ahead of Treasury's best case scenarios for economic recovery.

But as Prime Minister Jacinda Ardern has been at pains to point out, we are not there yet and going backwards would be economically devastating.

Celebration about increased freedoms should also be tempered by the fact that closed borders and a lack of international visitors still leaves an enormous hole in the economy.

Ardern has outlined a promising set of rules for level 2 which would see most businesses getting back to work in some capacity.

They include the opening of shops, malls, barbers, bars and cafes but with strict expectations about contact tracing and physical distancing.

A move to level 2 after two weeks instead of one month would put us slightly ahead of the expectations of most economic forecasts, said Westpac chief economist Dominick Stephens.

Treasury produced a range of seven potential economic scenarios less than a month ago.

It's best case at that point was for one month at level 4 followed by one month at level 3 with 10 month at either level 1 or 2.

Westpac's most recent modelling used a similar base case, Stephens said.

But Westpac is still forecasting unemployment rising to 9.5 per cent - its highest level in 27 years.

It also sees GDP contracting by 16 per cent in the quarter before bouncing back to -6.3 per cent for the year.

The issue was that "by far the biggest impact is the fact that the border is closed and there is no international visitors", Stephens said.

Westpac chief economist Dominick Stephens.

You could fiddle around with all the other rules and timings and it didn't make too much difference long term at a macro-economic level, he said.

The direct impact of level 2 rules would likely prevent about 4 per cent of New Zealand's total economic activity," he said.

While that didn't sound like a lot, it was actually "a huge number" in and of itself, he said.

From a forecasting point of view there was considerably more uncertainty about what level 2 would mean with much of the detail to be worked through.

The PM emphasised that there would be "flexibility" in the rules to help businesses adjust and customise to suit their operations.

"Levels 4 and 3 were fairly straightforward," Stephens said. "Under level 2 it's a bit more vague."

But there were other worrying issues caused by fallout from the hard lock-down period.

"My view is that sentiment will take quite a knock. The lockdown itself will be casting a long shadow," Stephens said.

"There will be people unemployed and not willing to spend, there will businesses that have to take on debt and they'll have to focus on paying down that debt rather than investing," he said.

House prices will be falling, people's KiwiSaver balances will drop and that will cause spending to be reined in. There's a global recession going on."

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