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COVID-19 Pandemic Vs Global Financial Crisis: NZ Economic Indicators Under The Spotlight

Summary

  • With several green shoots sprouting in the NZ economy, Kiwi Land’s Q2 GDP numbers appear to be a short-term economic shock
  • While Westpac’s consumer confidence index deteriorated in September, it is prevailing well above the level seen during the GFC.
  • The resilient performance of the NZ property market in rebounding from the COVID-19 storm has taken everyone by surprise.
  • The challenge lies in resurrecting housing construction, which has not really caught up since the GFC.
  • Looking at lessons from GFC, the continuation of infrastructure investment seems vital to help the NZ economy stand back on its feet.

The magnitude of COVID-19 disaster was initially underestimated by the policymakers worldwide. However, deep repercussions of the pandemic have ignited debates of its close resemblance with the global financial crisis (GFC) of 2008-2009. At the time when Kiwi Land seems to be tasting the bitter economic reality of the virus crisis, it is tempting to compare the economic upheaval triggered by the two events.

COVID-19 lockdowns have sparked the largest quarterly GDP fall on record of 12.2 per cent in June quarter. However, the nation seems to be faring better than expected in terms of economic revival. With several green shoots sprouting in the NZ economy, Kiwi Land’s Q2 GDP numbers appear to be a short-term economic shock, with the nation staging a quick recovery as soon as the restrictions are lifted.

Interesting Read: NZ Economic Charter: Three Silver Linings in the COVID-19 Cloud

Despite these optimistic projections, it is hard to neglect the uncertainty enveloping the vaccine development, the duration of the pandemic and the speed of economic resurgence from the crisis.

As similar uncertain shocks pushed the globe into a deep recession during the GFC, it is imperative to compare the extent of COVID-19 economic damage with the previous episode of crisis.

Let us quickly discuss the state of some economic indicators in NZ and their corresponding performance during the GFC:

Consumer Confidence: Under the Harrow

Kiwi Land’s consumer confidence plunged to its lowest level since the GFC in September quarter amidst mounting household concerns over the broader economic outlook. Westpac McDermott Miller Consumer Confidence Index slipped by 2.1 points in September to 95.1 points, as against 97.2 points in June 2020.

Reinstatement of coronavirus restrictions, fresh cases of virus infections, income crunch and rising joblessness kept households worried over the economic conditions.

While Westpac’s consumer confidence index deteriorated in September, it is prevailing well above the level seen during the GFC, when the index tumbled below 90 points. Though COVID-19 crisis has sapped Kiwis consumer confidence, the potential lifting of restrictions next week can turn the tables around.

Besides, widespread anticipations of a strong bounce back in economic activity over the third quarter are instilling fresh hopes of restoration in consumer confidence.

Housing Prices: Riding Against the Tide

Initially, speculations were rife over house prices dwindling sharply in 2020 akin to the GFC amidst downward pressure on both wages and income. However, the resilient performance of the NZ property market in rebounding from the COVID-19 storm has taken everyone by surprise.

Latest statistics from the Real Estate Institute of New Zealand (REINZ) revealed a surprising surge of 16.4% in median house prices during August 2020. Despite the second phase of lockdown in Auckland, the median house price surged by around 16% in August in NZ’s largest city.

RBNZ’s mortgage deferral scheme, removal of LVR restrictions and continuation of low interest rates seem to have given a leg up to the NZ property market in recovering from the COVID-19 crash. Currently, the challenge lies in resurrecting housing construction, which has not really caught up since the GFC.

Infrastructure Spending: Need of the Hour

The latest report from the Association of Consulting Engineers anticipates Kiwi Land’s current infrastructure deficit to be at up to NZD 75 billion or 25% of the GDP. The impact of under-investment in infrastructure over the past two decades appears to be driving infrastructure shortfall.

Kiwi Land observed a sizeable reduction in public investment during the 1980s and 1990s. While its infrastructure investment gradually picked up during the mid-2000s, the infrastructure spending cuts during GFC were deemed to be one of the key reasons behind the profound economic impact.

Although a considerable surge in infrastructure investment has been noted over the past 20 years, the nation still appears to be in the lower quartile of investment relative to Australia and other OECD countries.

At the time when the NZ has suffered its deepest contraction on record in June 2020 quarter, the continuation of infrastructure investment seems vital to help the economy stand back on its feet. However, fears loom over government running out of fiscal headroom for the infrastructure investment.

Bottom Line

All in all, the COVID-19 pandemic, which began as a sharp and short external shock, is now surmised to become a second devastating slump in Kiwi Land post the GFC. However, the NZ economy appears to stand in relatively good stead in recouping from the virus crisis, with encouraging signs of recovery already perceptible in the nation’s economy.

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