On December 11, 2019, Finance Minister Grant Robertson revealed the latest economic forecasts from Treasury and outlined his Government's plans for the year ahead.

Despite a downgrade of a small surplus into a small deficit for the coming year, the long-term outlook was rosy. 

It was thought the economy would pick up, growing at 2.5 percent per year on average for the four-year forecast period, ahead of Australia, the UK, USA and Canada.

This would lead to $12 billion worth of operating surpluses which would fund repairs to leaky hospital buildings, build new classrooms and boost the Super Fund.

Net debt would fall to less than 20 percent of GDP by 2024 and record low levels of unemployment would continue.

There's a tendency to report Treasury forecasts as though they are written in the stars. In reality they – like all economic forecasts – come with a significant margin of error. 

Usually this error is to be expected because economies are dynamic and unpredictable, but once in a while a completely unforeseen shock comes along rendering all previous forecasts meaningless. 

Covid-19 was one of these events.

Start again

Sometime in February or March Treasury began burning all their assumptions about the economy in 2020 and started from scratch.

The difference between the forecasts they issued in Dec. 2019 and the ones they delivered to policymakers in early-April were stark.

No doubt this was the most challenging period for economic forecasters in living memory. 

In fact, so great was the uncertainty around how things would unfold, Treasury produced no fewer than seven different scenarios for policy-makers to consider.

The chart below highlights three of those and compares them to the December 2019 forecasts. In scenario 1 the lockdowns are roughly similar in length to what was actually experienced, while scenario 3 outlines a worst case of a year spent in Levels 3 and 4, with catastrophic economic consequences. The scenarios did not include an outlook for the debt-to-GDP ratio.

While these were not forecasts, they highlight the high degree of uncertainty that existed in April.

One thing was certain though, there would be a recession, jobs would be lost and the government would need to spend to soften the blow, significantly increasing debt in the process.

Jobs – the first casualty

Jobless beneficiary numbers – released weekly by the Ministry for Social Development – were one of the best places to see the economic toll of covid-19 play out in close to real time. As NZ locked down, the figures released each Friday morning were increasingly grim.

Between March 20 and May 15, the number of people receiving the Job Seeker benefit leapt from 145,000 to 188,000.

Analysis of the jobless numbers revealed women and young people were being disproportionately hit by job losses, as were those in areas dependent on international tourism.

At the same time, the government was getting wage subsidy money out the door quickly.

By the middle of April, four weeks after the announcement of a Level 4 lockdown, the scheme was supporting 1.5 million jobs.

And by May this appeared to have had the desired impact on the labour market, with the numbers of new people going on the Job Seeker benefit each week beginning to plateau.


Mid-May brought a return to Level 2 and the Budget. Although it was still branded as a Wellbeing Budget, this was undoubtedly a covid-19 Budget.

Robertson's speech to Parliament mentioned 'covid-19' no less than 49 times, 'wellbeing' garnered a paltry seven mentions.

He went on to outline the extent of the economic damage now forecast, while saying the outlook remained uncertain.

The central forecast was for a 20 percent dip in quarterly GDP between March and June, an annual GDP decrease of 4.6 percent and an unemployment rate expected to peak at close to 10 percent in September.

The government's response was to spend big. A further $15.9 billion would go towards covid-19 recovery, on top of $13.9 billion which had already been spent at that point – mostly on the wage subsidy scheme. As a result, the net Crown debt-to-GDP ratio was forecast to be 54 percent by 2023.

The extra spending would allow for an extension of the wage subsidy scheme, albeit with a slightly higher threshold. This would enable the worst-hit businesses to continue to keep workers employed for a further eight weeks, at least.

End of initial wage subsidy

Despite the extension, the beginning of the end of the initial 12-week wage subsidy in mid-June signalled more labour market pain.

The number of people going onto jobless benefits surged again. This time, however, they were largely going onto a more generous benefit: the Covid-19 Income Relief Payment (CIRP) paid $490 per week, for 12 weeks, to almost anyone who lost their job due to the impact of the virus.

CIRP was far easier to get than a Job Seeker benefit and the uptake was quick, with about 20,000 people on the scheme by mid-July, although the government copped some flak for creating what was dubbed a 'middle class dole' that was unavailable to people made unemployed by factors outside covid, or before it.

There were 67,000 more people receiving some kind of unemployment benefit in mid-July compared to March 20 – 211,000 in total.

The first green shoots

Despite this second wave of joblessness, there were early signs some consumers were feeling more comfortable about their financial situation, with spending on electronic cards up $600 million in July 2020, compared to the same month in 2019.

The biggest increase came in sales of durables (furniture, hardware, appliances, etc) up by $259 million or 20 percent on the previous July. Consumables (food and drink) were also up significantly, even hospitality – shorn of international tourist dollars, always lower in winter anyway – out-performed July 2019.

Much of this was put down to the 'pent-up demand' from lockdown. A lack of money flowing overseas on international holidays was also cited as a possible reason for the retail spending boom, which would be interrupted briefly by the second Auckland lockdown, but pick up again in September and October.

An unexpected property boom

Something else unexpected began to happen about the same time. 

Across the country open homes were buzzing. It was proof, if ever it was needed, that Kiwis: a) pay very little attention to economic forecasts; and b) have an unbreakable faith house prices will continue to increase indefinitely.

In June, the first full month without lockdown restrictions, the median house price increased by 3.1 percent, up to $639,000.

The momentum in the property market showed no signs of abating in July and August, which brought similar increases to the median value. 

The housing boom after lockdown was fuelled by the Reserve Bank's response to the looming crisis back in March, which had the impact of lowering mortgage interest rates as well as removing loan-to-value ratio restrictions, which tended to rein in speculation by property investors.

Low interest rates, increased investor appetite, better than expected economic conditions and NZ's chronic shortage of housing supply combined to generate a property market boom in the midst of a historically deep economic shock.

When home owners feel wealthier, they are inclined to spend more freely, providing a boost to economic activity – the so-called 'wealth effect'. But the long-run impact of rapid house price inflation on inequality and social cohesion are serious.

As the property boom accelerated through September, October and November, this issue would come to dominate the national conversation, as would the role of the Reserve Bank in fuelling it.

Pre-election update 

In mid-September, armed with another slightly rosier outlook for the economy, Treasury released its first economic update since the Budget in the Pre-election Economic and Fiscal Update.

It painted a still pessimistic and uncertain picture of the economic outlook, but things were again on the upside relative to the last round of forecasts published in the Budget. 

Unemployment was now forecast to peak at 7.7 percent in June 2021. The short-term outlook for the net Crown debt-to-GDP ratio also improved, although was still forecast to surpass 50 percent in 2023.

No third wave

The election came and went and in the meantime the wage subsidy coverage petered out.

Through the middle part of the year many had viewed this period as potential doomsday for the economy. Surely without the wage subsidy the most stressed businesses would fold and job losses would spike again?

But, as yet, neither has come to pass. Liquidations are below levels seen in normal times and there was only a small increase in new jobless beneficiaries through September, far below the levels seen at the start of lockdown and then again in June as when the initial wage subsidy ended.

Then in October, something even more unexpected happened: the number of people receiving a jobless benefit began to decline. While only modest, the numbers out of work were down by about 3,000 over the month.

Those numbers stabilised in November, before picking up slightly again in the first week of December. 

Half full or half empty

Which brings us to December's half-year economic and fiscal update for 2020, published last week. Like all previous updates from Treasury in 2020, it provided a rosier outlook than the one which came before. More proof that NZ has avoided the absolute worst case scenarios outlined in April.

Made with Flourish

But compared to the picture painted a year earlier, the situation remains serious.

Unemployment now seems unlikely to hit 10 percent, but is still forecast levels to be close to 7 percent in the year to June 2021 (6.8 percent), although the forecast drops back to a respectable 4 percent by June 2025.

The net Crown debt-to-GDP ratio is still forecast to climb past 50 percent by 2023, a burden that will take many years to repay, although it is seen falling again to 46.9 percent in 2025. That may give the government options to spend more to support the economy, if necessary, in next year's Budget.

Meanwhile, Treasury (and every other major economic forecaster) now says there will not be a housing market correction.

The forecast is for the steady onward march of house price inflation, with a forecast increase averaging 5.8 percent over the next five years.

The end of the recession

The final piece of better-than-could-have-been-expected economic news in the second half of 2020 arrived the day after the half-year update, with official GDP figures showing the economy grew by 14 percent, quarter-on-quarter, in the three months to September, more than making up for the 11 percent contraction in the second quarter of 2020 – a figure that was revised down from 12.2 percent at the same time.

It seems with every subsequent piece of economic data and each new round of forecasts the outlook is more optimistic than was thought. Whether that pattern can continue through a summer without international tourism and an uncertain wait for vaccines to end the pandemic in 2021 remains to be seen.

Our first opportunity to test the trend will be the Budget Policy Statement, likely to be published in February. While the BPS does not generally include new forecasts, it does set out the government's spending intentions, with the benefit of a Christmas under our belts and the global course of the pandemic further updated.