While we worry, leading international agencies remain confident in New Zealand's economic outlook

Standard & Poor's: smaller long-term impact on New Zealand

Standard & Poor's, one of the world's three major rating agencies, said in a recent assessment that the economic downturn caused by COVID-19 would be uneven across Asia-Pacific, with New Zealand among the countries facing smaller long-term losses, as it is one of a limited number worldwide to have promptly introduced targeted economic stimulus measures and effectively contained the outbreak.

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“New Zealand is certainly one of the first economies to emerge from the pandemic's severe disruption. Clearly, this is largely because the resumption of face-to-face services, which are crucial to the labour market, has enabled the economy to restart smoothly and given people hope of returning to work soon,” said Shaun Roache, Standard & Poor's chief economist for Asia-Pacific.

The assessment forecast that New Zealand's GDP would face a long-term cost of approximately 2.7%, broadly on a par with Japan and Australia and far below the impact of the global financial crisis.

 “Achieving an economic rebound as quickly as possible will be very important, but we still expect a substantial blow this year,” Roache said. “The situation is different this time. The biggest constraint on New Zealand's economy will be international travel and tourism. This accounts for a substantial share of New Zealand's GDP, but will not recover quickly in the short term.”

He therefore expected New Zealand's economy to contract this year by 5%, before rebounding in 2021 with growth of 6%, followed in 2022 by growth of 3.4％，2023 with growth of 3％。

The assessment also provided several other forecasts:

• Unemployment was expected to peak at 8% this year before falling to 4.9% by 2023.
• Inflation was expected to rise by 8% next year and by 2% by 2022, while remaining around the midpoint of the Reserve Bank of New Zealand's 1% to 3% target range.
• The Reserve Bank was expected to keep the Official Cash Rate (OCR) at 25% through to 2022.
• Over the next three years, the New Zealand dollar's exchange rate against the US dollar would remain below 1:68.

How will New Zealand's business outlook change?

Do effective containment and a swift exit from nationwide lockdown fully explain international confidence in New Zealand's economic recovery? Sam Stubbs, founder of KiwiSaver provider Simplicity, recently wrote that COVID-19 would have positive long-term effects on New Zealand's business environment in at least three ways.

He argued that New Zealand's economy had long been hampered by three major disadvantages: remoteness, a lack of capital and infrastructure, and low productivity. The pandemic, however, would fundamentally change all three.

• Video conferencing makes distance irrelevant

New Zealand has long been seen internationally as a small, remote country, making it difficult for local exporters to remain competitive overseas. But as COVID-19 gets major international companies accustomed to doing business through video conferencing, distance becomes irrelevant.

Stubbs said this was particularly significant for New Zealand businesses: the further away they had been, the greater the distance they could now close. Success in business is closely tied to relative competitiveness.

There are many precedents for technology transforming New Zealand. The development of the internet may be a major reason for New Zealand's steady rise in the Organisation for Economic Co-operation and Development (OECD) rankings over the past 20 years. Going further back, refrigerated ocean transport brought considerable benefits to New Zealand in 1882.

• Low interest rates steer investors towards higher-risk investments

Risk capital is an important component of future productivity and wealth. COVID-19 has driven interest rates sharply lower worldwide, prompting more investors to seek higher returns through riskier investments, including start-ups and rapidly growing businesses. New Zealand has historically received such investment.

New Zealand has long appealed to investors seeking high risks and high returns because of its low debt levels. This is also one of the fundamental reasons the three major international credit rating agencies have consistently awarded the New Zealand Government their highest ratings over the years. Even after the Government introduced large-scale economic stimulus in response to the pandemic, debt remained relatively low. Local KiwiSaver savings, together with the NZ Super Fund, Māori iwi and ACC, are steadily increasing New Zealand's pool of domestic savings capital, which could exceed NZ$400,000,000,000 by 2030.

The renewed appetite for risk and the resulting increase in capital investment will greatly benefit local businesses. A shortage of domestic investors and larger investments has long been a major weakness for local businesses. That is now changing.

Stubbs also believes that idle capital and a strong post-pandemic appetite for investment will eventually kick-start substantial, much-needed infrastructure development in New Zealand. The Government need only decide whether to invest alone or through public-private partnerships. Everyone will benefit.

• New Zealand's successful pandemic response will attract more talent

Better access to global markets and increased capital will certainly help New Zealand's economy. Ultimately, however, productivity depends on people. Stubbs believes that, after COVID-19, the world's best talent will increasingly want to work in New Zealand. This will help the Government develop post-pandemic immigration policies that place greater emphasis on migrants' skills, with the focus on migrant numbers rather than quality.

Stubbs also discussed how to make full use of natural resources to improve productivity. The pandemic has exposed the risks of mass tourism. Before the borders reopen, there is time to explore shifting tourism's future focus from attracting more visitors to pursuing higher value, positioning New Zealand as a luxury brand in ecotourism.