Economic Weekly: Trying to stay positive

This week brings a potentially significant event for the NZ economic outlook. And it’s not the Q2 GDP figures due Thursday. Today, Cabinet reviews NZ’s Alert Level settings. Any change would take effect midnight Wednesday. We know from the first time around that any shift down in Alert Levels would be significant for parts of the economy.  Business confidence is rebounding, but we’re cognisant that operating at Level 2/2.5 is getting harder for some. Not only is the wage subsidy winding up, but balance sheets bruised in the first lockdown have less buffer now.

The GDP figures due Thursday will “officially” confirm NZ suffered a deep recession over the first half of the year. We’re forecasting a quarterly contraction of 11% (preview here). A terrible outcome undoubtedly, and easily the largest decline on record, but still a lot better than the circa -20% forecasts that were doing the rounds in March/April. The general run of the economic green since the June quarter has also pleasantly surprised most economic watchers. 

Still, for every day that goes by with no prospect of the borders re-opening, no proven vaccine, and ongoing global scrambling to contain COVID-19 flare-ups, the more the medium-term outlook gets foggier. This is what we’re attributing to last week’s further ramp up in market speculation of RBNZ OCR cuts. In fact, yields on several NZ fixed income instruments briefly fell into the negatives for the first time ever. One for the scrapbook. Keep your eyes peeled for two notes from ASB Economics this week that will lay out the effects of negative rates. Mark Smith will publish on the pros and cons and general issues associated with negative rates, while this author sets out some implications and recommendations for corporates exposed to interest rate risk in the upcoming Q3 Corporate Hedging Toolbox.