Economist weighs in on cost of lockdown as the country prepares to split into two alert levels

A full nationwide lockdown costs an estimated $1.9 billion each week in lost activity, ASB chief economist Nick Tuffley says.
A full nationwide lockdown costs an estimated $1.9 billion each week in lost activity, ASB chief economist Nick Tuffley says. Photo credit: GettyImages.

Compared to being at alert level one, a full nationwide lockdown is estimated to be costing the country $1.9 billion in lost activity each week, ASB's chief economist says.

But from Tuesday, that cost will drop to around $1.1 billion, when alert levels across the country are split into two. 

The estimates come on day 13 of COVID-19 level 4 lockdown. From 11.59pm on Tuesday, everywhere south of Auckland will move to alert level 3. Auckland will stay in alert level 4 for at least another two weeks, to be reviewed on September 13.  Northland will move to alert level 3 at 11.59pm on Thursday, if wastewater tests come back clear.

From Tuesday, the change to alert level 3 allows businesses south of Auckland border to offer contactless services. 

Although businesses that require close physical contact still can't open, supermarkets, dairies, butchers, fishmongers, greengrocers, petrol stations and pharmacies can serve customers on their premises. Retail stores can offer contactless click-and-collect. 

"It's still hurting those businesses who can't operate, but it is at least starting to drop away the cost of the current lockdown," ASB chief economist Nick Tuffley says.

When the whole country is in level 4 lockdown, Tuffley estimates the cost of what the country can't produce to be 0.5 percent to 0.6 percent of annual Gross Domestic Product (GDP).  An official measure of economic activity, GDP represents the value of finished goods and services made in New Zealand.

With part of the country moving to alert level 3 on Tuesday, annual GDP losses are expected to halve, to around 0.3 percent.  

Based on how the economy was tracking pre-lockdown, unless the lockdown is prolonged, Tuffley expects GDP to end up around three-quarters-of-a percent lower than it would've been. Spending and activity are expected to rebound as alert levels loosen.

"We still think we'll be finishing the year higher than the midpoint of this year, but we just won't be growing quite as strongly over the whole year."

Following last year's nationwide COVID-19 level 4 lockdown, (March 25 to April 26), GDP fell by a record 12.2 percent in the June  2020 quarter. It followed a 1.6 percent drop in the March quarter, putting the country officially in recession. 

With Auckland remaining at alert level 4 while the rest of the country moves to alert level 3 on Tuesday, it marks just under two weeks of a full nationwide lockdown.   

"We still think we'll see a reasonably sizable drop in GDP in the third quarter [September 2021 quarter] - somewhere between 6 and 7 percent - but then rebounding by about 8 percent," Tuffley says.

"Overall, it's not going to be as severe as what it was during the big lockdown of last year [2020]."

ASB is forecasting the first Official Cash Rate rise in [seven] years on October 6, the Reserve Bank's next scheduled Monetary Policy Review.

Releasing its August Monetary Policy Statement on day one of the level 4 lockdown, the central bank said it was confident inflation and employment targets would be met. There was less need for the existing level of monetary stimulus.  

The decision to keep the OCR unchanged in August was due to "heightened uncertainty with the country in lockdown".

"At this stage, we still think the Reserve Bank looks pretty set on lifting the Official Cash Rate," Tuffley says. 

Higher oil prices, supply shortfalls and rising transport costs were expected to "push inflation past 4 percent" in the near-term, returning to the 2 percent midpoint by the end of 2022, the Reserve Bank statement said. 

Employment was "at or already above" its maximum sustainable level.  

"Those things may not change dramatically by this lockdown...a lot of the inflation causes are still going to be there, [the] tight labour market will be there [and] all the cost pressures of trying to import from across the border aren't going to be changing," Tuffley adds.