Coronavirus: 'All we've seen is the disruption, the real recession starts now' - economist

Economists forecast unemployment to rise and discretionary spending to drop.
Economists forecast unemployment to rise and discretionary spending to drop. Photo credit: Getty.

Despite daily COVID-19 cases hovering around zero and alert level 2 causing a jump in retail spending, experts say the economic fall-out of COVID-19 is just beginning.

It comes as companies such as Fletcher Building, Air New Zealand, Smith's City and Trade Me announced cuts to jobs and Bunnings and Michael Hill close stores, and the end of the 12-week wage subsidy from mid-June.

Economist Shamubeel Eaqub said that initial pent-up spending after lockdown was expected. As the wage subsidy runs out and the country settles into recession, he expects business cost-cutting to continue. 

"This is the beginning: all we've seen is the health disruption, the real recession starts now," Eaqub said. 

Around 80,000 jobs were lost during the Global Financial Crisis (GFC).  As a result of COVID-19, Eaqub sees job losses being two-to-three times that.  However, the real concern is that fear and uncertainty is causing a retraction in household spending and investment, including large-scale purchases and construction.

"Global trade has come off a lot and current drought [means that] the outlook for agriculture is also tough," Eaqub added.

He said that while Treasury is forecasting a short, sharp recession similar to the Global Financial Crisis, the COVID-19 environment is a lot different, with certain sectors coming to a complete stop.

"More likely, it's going to be a very deep recession and a shallow, long recovery," he said.

The unemployment rate is currently 4.2 percent (March 2020 quarter). Sharon Zollner, chief economist at ANZ, said that bank forecasts put the peak rate at 10.5 percent (Q3, 2020), dropping to 9.4 percent by the end of the year.  Budget 2020 reports show Treasury's main  forecast for unemployment in 2020 is 8.3 percent.

She said that what's more important is the rate of economic decline after the peak in unemployment, as in two years' time, the unemployment rate is unlikely to be back to pre-COVID-19 levels.

"At the end of 2022, we have the unemployment rate at 5.7 percent," Zollner said.

Labour market changes typically lag six months' behind changes to the economic cycle. COVID-19 is different in that it not only affected every sector but also brought a wide number of business activities to a complete stop. 

Zollner expects to labour market data to be volatile, with a spike in unemployment when the wage subsidy runs out in late June - and another at the end of the subsidy extension in August.

"We see the unemployment rate remaining elevated because firms are naturally cautious in bad times.

"The virus shock requires reallocation of resources across the economy and reskilling and relocating isn't a fast process," Zollner said.

Caution around spending decisions will feed into a negative economic outlook, but this could be a welcome reprieve for house-hunters.

"We'll see downward pressure on house prices and rents [and] fewer renovations," Zollner added.

The start of alert level 2 saw an increase in spending, particularly at pharmacies and fruit and vegetable outlets, a trend which is likely to continue as households cut back on discretionary spending.

"[We're] likely to see substitution towards cheaper products: home brands rather than fancy brands, sausages rather than steak."

Overall, shops will continue to do it tough as households cut back on discretionary spending. 

"The household debt level relative to incomes is about the same as it was going into [the 2008-2009] recession and this shock is bigger for the economy," Zollner added.