Three major developments since the May Budget have changed the Treasury's view on how things are unfolding due to covid-19, according to Secretary Caralee McLiesh.
The Treasury's economic scenarios for the budget were finalised on April 17 and it still expects the New Zealand economy will face the sharpest contraction on record in the June quarter, followed by a prolonged recovery, McLiesh told Parliament's finance and expenditure select committee.
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However, since that time "three major developments have affected our view of the outlook."
First, the successful containment of the virus enabled an earlier-than-anticipated move to alert level 1. The country lifted all restrictions within the country's borders on June 8.
"A sustained period in alert level 1 measurably increases GDP and employment relative to what we published in the budget," she said.
In the budget, the Treasury forecast annual average GDP would shrink 4.6 per cent in the June year, before expanding 0.6 per cent in 2021 and a more rapid bounceback of 9.3 per cent in 2022. Unemployment was seen peaking at 9.8 per cent.
Second, there are some initial indications that the June quarter activity has "held up better than expected."
Measures of retail spending – such as electronic card spending – have now returned to pre-covid levels and heavy traffic volumes had returned to around 95 per cent of pre-covid levels by the end of last week. While jobseeker benefit numbers have increased significantly, "they do remain somewhat less than forecast," McLiesh said.
"We remain cautious, however, whether this improvement will be sustained."
The third development "works in the opposite direction," she said pointing to a weaker world outlook that will weigh on the growth prospects for NZ.
She noted recent revised Organisation for Economic Cooperation and Development forecasts are very weak for both a single wave of infections and a second wave scenario.
If there is a single wave of infections, the OECD now anticipates NZ's trading partners will see a 4.5 per cent contraction in 2020 and 5.5 per cent growth in 2021 "and that will create a significant drag on New Zealand's recovery," she said.
"On balance these three developments do suggest some near-term improvement relative to our budget forecasts, but also a slower recovery," she said.
"The outlook does continue to be extremely uncertain."
Given public interest in the economic outlook and the impact of covid-19, the Treasury will provide an updated assessment and analysis when it releases its weekly economic update at the end of June.
Its next official forecasts will be released in the pre-election economic and fiscal update between Aug. 10 and 21.