Treasury Report T2020/973: Economic scenarios - 13 April 2020

Executive Summary

The COVID-19 pandemic is a 'once in a century' public health shock that is also having a profound impact on economic and financial systems around the world and in New Zealand.

The impact of COVID-19 and related response measures on the New Zealand economy is highly uncertain. To reflect this uncertainty this report considers several alternative paths that the economy may take. These paths vary based on different assumptions about the time spent at different COVID-19 Alert Levels.

The first five scenarios assume no additional fiscal support measures beyond the approximate $20 billion of direct support that has already been announced. We also consider the economic outlook if the world economy is weaker and takes longer to recover. Key results include:

• Falls in annual GDP are greatest in the year to March 2021, and vary from a decline of around 13% in Scenario 1, the least restrictive of the scenarios considered, to closer to one third in Scenario 3 which involves tight restrictions throughout the year. 
• Peaks in the unemployment rate vary from around 13% in Scenario 1 to nearly 26% in Scenario 3.
• Inflation remains below the 2.0% mid-point of the target range throughout the forecast period, and monetary conditions are supportive throughout.

In addition to domestic conditions, the world outlook is also highly uncertain. The international trend has been towards longer periods of public health interventions to limit physical interactions. This implies some risk not only to activity in the affected countries, but also to the trade and financial linkages between countries, which are critical to a global economic recovery.

Should global economic recovery be slowed further by measures to combat the spread of COVID-19, we might expect the weaker world economy to have a greater impact over the medium term recovery. Weaker world demand weighs on New Zealand’s income growth, with reduced exports and domestic investment demand.

Finally, we look at scenarios that include additional fiscal support, which support businesses and cushion the fall in income and employment for households. These scenarios and associated nature and levels of fiscal support assumed are highly stylised and intended to be illustrative of orders of magnitude in the macroeconomic variables of interest. The timing and delivery mechanisms through which support is provided will be important in determining the overall economic impact.

Compared to Scenario 1, an additional $20 billion in fiscal support ($40 billion in total) cushions the decline in output and lowers the unemployment rate. In Scenario 2a, additional direct fiscal support is increased by $40 billion ($60 billion in total). Relative to Scenario 2, GDP growth is higher and the unemployment rate is lower by around 6 percentage points in the June 2021 quarter.