Coronavirus: No Xmas bounce or V-shaped recovery for the economy this time around - economist

A prominent economist says Monday's roadmap to living with COVID-19 is not good news for the economy, and Kiwis shouldn't expect the kind of rebound that came after last year's lockdown.

Rather than tightening restrictions to stamp out the stubborn Delta variant outbreak, the Government on Monday instead revealed a phased transition to reopening - widely reported as an end to the elimination strategy. 

After the historic hit to the economy during last year's lockdown, wiping out COVID-19 led to a historic rebound - falls in GDP of 1.4 percent and 9.9 percent in the March and June quarters was offset by a huge 13.9 percent gain in the September quarter. Unemployment - at one point tipped to hit double-digits - peaked at under 6 percent, and gradually fell to its pre-pandemic level\. 

"What we saw in 2020 is that pent-up demand can be absolutely furious," Cameron Bagrie told The AM Show on Tuesday. "Are we going to see a repeat? … The short answer is no."

That's because it's likely the virus is now here to stay. New Zealand was an outlier with its elimination strategy last year, and reaped the rewards - suffering less economic damage and fewer deaths than most other countries. 

The key advantage New Zealand has in 'living with the virus' is it comes after the arrival of vaccines, which dramatically reduce the likelihood of infection or serious illness. 

"It's basically a two-horse race at the moment between Delta cases moving up and getting that vaccine rate high enough so we can drop down to an alert level where the business community can get out and make a little bit of cash," said Bagrie.

Perhaps just a little bit though. With the virus circulating, it's likely some restrictions will stay in place a lot longer than Kiwis are used to, limiting the economic rebound even as Christmas shopping begins.

"When you go through lockdown… you are going to see a bit of pent-up demand, excitement, as you move down those alert levels," said Bagrie.  

"I think people are realising that V-shaped recovery we saw last year is not going to repeat this time around. It's going to be more of a U. Delta is going to have an enduring impact on the economy over a long term."

In a V-shaped economic recovery, a sharp fall is followed by an equally sharp recovery.

"Elimination was short and sharp - it worked in 2020. Elimination does not work in 2021, 2022, and that's going to shape spending patterns and economic growth. It's a U - it's a more subdued economic trajectory going forward." 

And for that reason, he expects the Reserve Bank (RBNZ) to once again put off raising interest rates. In August, the RBNZ was expected to nudge them up from the record-low 0.25 percent they've been at since March 2020, but then the Delta outbreak began.

Similar expectations have been in place for this week's announcement, due on Wednesday, but Bagrie says the end of the elimination strategy means there will be more uncertainty. 

"If I was the Reserve Bank in all honesty tomorrow I would be pausing… they can kick the can down the road a little bit, six weeks. If they need to hike 50 basis points in November, hike 50 basis points in November. 

"But it just doesn't seem right at the moment to be lifting interest rates, at a time when you've got the economy in lockdown, and we know that COVID case counts are going to be escalating over the coming three to four weeks."