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What to expect in the back half of 2020

A New Zealand perspective on what's coming next

Economists always get a kick out of trying to anticipate economic movements. We do it a lot, which is part of why we get it wrong a lot. In some of my previous posts I've had a guess at what to expect for the economy and what could come for young people. Here is some of what to expect for the back half of 2020 in New Zealand.

1) A spike in businesses failing and unemployment as the wage subsidy ends

Expect greater unemployment and bankruptcies from July. The NZ Government's wage subsidy runs for 12 weeks. Many businesses would have taken the subsidy around March/April. 12 weeks takes us through to late June/July. For many businesses this subsidy is probably the only thing keeping them going with such low consumer spending. When that subsidy runs out, expect businesses to start shutting down. Sure some businesses will have cash reserves for a few months for this type of scenario, but demand is probably going to be low until we get a vaccine. Or should I say, if we get a vaccine, it is not a foregone conclusion. Businesses in tourism and accommodation in particular are going to struggle to survive. Unless the Government extends the wage subsidy we can expect to see many more people unemployed from July as businesses close.

2) A fall in house prices and increase in mortgagee sales from September/October

With increased unemployment I suspect we will see a fall in house prices and an increase in mortgagee sales. The wage subsidy will help many survive and pay their mortgages short term. On top of that banks are offering mortgage holidays for up to six months. These initiatives will help many stay in their homes for about nine to twelve months. Eventually though the support will run out and many people will be without jobs. At that stage we can expect greater numbers of people defaulting on their mortgages and a fall in house prices. I suspect we will see the best buyers housing market since the Global Financial Crisis (GFC).

3) Commencement of shovel ready infrastructure projects

The Government is accelerating investment in infrastructure projects to stave off the worst effects of recession. The goal of these investments is to create jobs, particularly for low skilled workers who might have lost their jobs. Infrastructure investment is a well tested method of lifting an economy out of recession due to the large amount of spend. It could be a great time to be in infrastructure and construction. Personally I would like to see more community level projects as well.

4) Ongoing low rates of transmission with the odd spike in cases

Getting rid of coronavirus entirely is remarkably difficult due to the incubation period. The incubation period is the time during which someone might have the virus but show no symptoms. Typically it runs for about five days but could be up to two weeks. We will continue to see cases after lockdown ends, hopefully in the since digits. We may see no cases for a week and then a multiple cases as a cluster is identified. At some stage there will probably be a spike in cases as someone regularly in touch with a large number of people, perhaps a checkout operator, contracts the disease. Eliminating the virus entirely is a challenging.

5) Return to a more normal way of life but in a "90% economy"

When lockdown ends the economy will come back to life, it won't be all there. The Economist is describing this as the "90% economy". Perhaps we skip a beer after work to avoid being around other people. Attendance at many previously crowded venues like stadiums or movie theatres will continue to be low. Public transport trips will be reduced. When we walk down the street we may continue to observe social distancing. I think many of us can feel it in our gut - even after lockdown life won't be normal.

To wrap up

Preparing ourselves for the post-coronavirus economy is just as important as preparing for the lockdown itself. Domestic economies will restart but the global economy will lag behind as borders remain closed to reduce the risk of transmission. Governments will have to continue to be vigilant to the ongoing risk of coronavirus while also fighting the economic turmoil. Pressure to relax restrictions will be immense as people try to return to their everyday lives and jobs. Until a vaccine is developed there is little chance of life returning to normal.


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