Economic impacts will depend on crucial determinants
With COVID-19 hitting various markets around the world, many economists have been wondering what lies ahead for each country’s economy. As a result, ASB outlined possible paths for the New Zealand economy in an uncertain future.
ASB economists previously noted that 2020 would be a challenging year, with pronounced volatility. As a result, they focused more on the country’s economic future and risk profile than point forecasts, which currently have an “extremely limited shelf-life.” The bank’s latest study details three potential paths for the NZ economy amid the pandemic:
1. Central scenario
ASB senior economist Mark Smith considered this possible path as a “U”-shaped recovery. In this scenario, he predicted a sizeable, but hopefully short-lived, economic downturn as more firms shut down and more people lose their jobs despite the government’s efforts.
“There are [also] moderate falls for NZ house prices. The economy settles into a modest recovery from 2021, with weaker balance sheets, caution, and a softer income backbone to temper the rebound,” Smith said in the report.
2. Upside scenario
In this potential path, the ASB economists predict that the pandemic would be more short-lived because of the efforts of the government, firms, and households.
“This is more like a “V”-shaped recovery, with a sharp-and short-lived hit to NZ economic activity and is close to a typical cyclical recovery. Impacts for NZ house prices and employment are less acute than in the central scenario,” Smith explained.
3. Downside scenario
If all else fails, the ASB economists predict a widespread and long-lasting disruption and economic dislocation.
“Falls to NZ house prices and employment are larger than in the central scenario. A larger and more drawn-out NZ and global economic downturn ensues. This is closer to a wider “U”-shaped forecast profile for the NZ economy,” Smith said.
Smith said each scenario would have different economic implications, and the economic impacts would depend on crucial determinants such as the severity of the pandemic, containment actions taken, and policy offset.
“COVID-19 is a viral outbreak, and sectors that rely on person-to-person contact and the movement of people will face greater challenges. The more flexible and adaptable the economy to cope with the changing landscape posed by COVID-19, the better the economy will be able to cope and the lower and less protracted the economic hit,” he added.
