It’s a matter of hope rather than certainty – Westpac says the recession will be deep but brief

Bank economists must wonder about the prudence of injecting firm figures into their forecasts at the best of times.  It’s much more challenging when a virus is rampaging around the globe.

But regardless of any misgivings, the economists are not only portending a significant GDP shrinkage  in the foreseeable future – they are talking (for example) of GDP falling 3-4% this year (the ANZ) or by 3.1% over the first three quarters of this year (Westpac).

The percentage point has to be admired.

But the most important information these economists have emailed to their customers and the news media today is that the outlook is highly uncertain.

In other words, they don’t really know how much GDP will shrink or for how long it will keep shrinking, but here’s their best shot at it for a public desperate to know how bad things will get during the virus-driven downturn.

The ANZ team is not trying to pretend otherwise.  They say:

“Forecasting has become an almost-impossible task.”

And this being so, Westpac was right to include the word “hope” in the headline atop its latest analysis.  It summed up things succinctly:

“The coming recession: deep, but hopefully brief.”    

Having emphasised those caveats, Point of Order passes on some nuggets from what the two banks are saying.

The ANZ –

Bottom line

 We are now at the beginning of a significant economic downturn. Our
best guess is that GDP will fall 3-4% this year, though the outlook is
highly uncertain. GDP grew 0.5% q/q (1.8% y/y) in Q4 last year.

 Monetary and fiscal stimulus announced this week will cushion the blow,
and more Government support is on the way. And yet, still more stimulus
is needed. We expect the RBNZ will need to start large-scale asset
purchases soon. Market intervention is also urgently needed.

The outlook

The global economy is now in the midst of an unprecedented synchronised
slowdown.

New Zealand will experience a recession this year, and it could be
deep.

The economic impacts of what is unfolding are difficult to quantify; the
economics textbook has gone well and truly out the window.

There’s no way to sugar coat it; the year ahead will be difficult for many. And
we can’t emphasise enough how uncertain the outlook is at present.

Forecasting has become an almost-impossible task. For the GDP outlook, we
are thinking about a wide range of possible scenarios, with a contraction
perhaps in the range of 1-9%, depending on how developments play out.

Our best guess at this stage is that the economy will contract 3-4% this year,
even with fiscal and monetary stimulus. Impacts at the larger end of this
range could be seen if there was a sustained outbreak here, if credit markets
were to seize up, or both.

Encouragingly, the Government and the RBNZ have stepped up the plate to
provide stimulus and cushion the blow. The Government’s $12bn (4% of
GDP) response package is bold and broad, as it needs to be to match the
seriousness of the situation.

The Government has indicated that they are willing to do more, and we think they will need to – more initiatives are expected in the May Budget.

Fiscal spending and net debt are expected to increase sharply, but there is plenty of scope for that. If ever there was a time for that to happen, it’s now.

The RBNZ has slashed the OCR, committing to keep it at 0.25% for at least a year. They have also delayed increases in bank capital requirements to help support credit creation, and they stand ready to support the functioning of the financial system.

We expect urgent intervention given current stresses,  and large-scale asset purchases as soon as they can be deployed to provide more stimulus. This will help soak up some of the increased supply of Government bonds that are now a certainty as the fiscal spending outlook balloons.

According to data released today, GDP growth was running at 1.8% y/y in Q4 
(more details follow). By contrast, we currently forecast annual growth to
average -3½% over the year to March 2021. 

At this stage, we assume a recovery that gathers pace from the middle of next year. Strong rates of growth are then expected as the economy returns to something resembling normal.

However, the bounce-back will not be complete. Unfortunately, some
spending that would otherwise have happened will simply be lost.

 Westpac –

The coming recession: deep, but hopefully brief.

– The Covid-19 recession will be deeper than the GFC. We expect GDP to decline 3.1%, compared to 2.7% in 2008/09.

– We expect unemployment will rise from 4% to 5.5%, or by 45,000 people.

– This will be a briefer recession than the GFC so long as the banks and the Government remain in good financial shape.

– There is currently stress in financial markets. This could lead to an unintended increase in interest rates unless the RBNZ takes action.

– We predict that the RBNZ will begin quantitative easing (buying Government bonds) within a week in order to keep interest rates low.

– We further predict that the RBNZ will initiate a Term Auction Facility to ensure bank funding remains smooth.

– And we predict that the Government will create some form of loan guarantee scheme to slow potential company failures in the tourism and travel industries.

– Government debt is likely to rise above 30% of GDP in short order. That is an appropriate response, but the Government also needs a plan to bring debt down again later.

– Fortunately New Zealand’s banks and Government are starting from a very strong
position. With the above actions in place, they are well-placed to weather the coming storm, allowing for an orderly post-virus recovery.

The Covid-19 situation has escalated dramatically. New Zealand is inevitably heading for a severe recession – we are forecasting that the economy will shrink by 3.1% over the first three quarters of this year.

In the June quarter alone we expect GDP to fall 2.7%. For comparison, during the Global Financial Crisis it took eighteen months for the economy to shrink by 2.7%. However, this recession will have a completely different character.

Allowing people to congregate and travel again will lead to a rapid initial uplift in activity, meaning a briefer recession. However, it will take years for the economy
to fully recover from the damage to business balance sheets.

We are forecasting that unemployment will rise from 4% to 5.5%, less than the 6.5% reached in the GFC due to the temporary nature of the disruption and the Government’s response. And we expect house prices to fall about 3%, compared to 10% during the GFC.

The crucial factor deciding how long this recession lasts is
the health of the financial system. There are signs of stress
emerging in markets. Left unchecked, this would cause an
unintended increase in interest rates, which is the opposite
of what the RBNZ wants.

We predict that the RBNZ will counter with quantitative easing and a Term Auction Facility soon. Fortunately New Zealand’s banks and Government are starting from a very strong position, so with the above RBNZ actions in place the situation should remain orderly.

 There’s much more to muse on in the rest of the Westpac analysis HERE.

 

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