(Bloomberg) — New Zealand’s lofty ambition to eliminate the coronavirus may pay dividends as it begins to rebuild its economy and promote itself as a safe haven for global business.
As Kiwis emerge bleary-eyed from one of the strictest lockdowns in the world, the government says its strategy of hitting Covid-19 early and hard will allow a much faster return to some semblance of normality. To hammer home the advantage, the finance minister has announced fiscal stimulus worth more than 20% of gross domestic product, predicting that will jump-start growth and get the jobless rate back to its pre-virus level of 4.2% within two years.
“Unlike most of the world, because of the success of our lockdown we now have a shot at just a regular horrible recession,” said Sharon Zollner, chief economist at ANZ Bank New Zealand in Auckland. “That is actually something to celebrate. There is a cautious optimism in New Zealand that we know what we’re dealing with now.”
The island nation at the end of the world appears to have succeeded in stamping out the virus, reporting just two new cases in the past week. Prime Minister Jacinda Ardern claims this gives the country a “safe-haven strategic advantage” that will help it recover ahead of its peers. To pull it off, New Zealand will have to overcome the loss of its biggest foreign-exchange earner, tourism, which has been decimated by the closed border, and hope there is strong global demand for its food.
“Even if we eliminate the virus, there is the risk the global pandemic rages for years, not months, in which case there would be a limit to how strong the New Zealand economy can grow,” said Nick Tuffley, chief economist at ASB Bank in Auckland.
GDP is forecast to plunge as much as 23% in the second quarter after the seven-week lockdown brought the economy to a shuddering halt. All but the most essential services were closed and people were required to stay at home except to go to the supermarket, seek medical assistance or exercise. Unable to get a haircut or buy a takeaway meal, New Zealanders looked with envy across the Tasman Sea at Australia’s less onerous restrictions.
But the strategy appears to have stopped community transmission of the virus — New Zealand has reported just 1,499 confirmed and probable Covid-19 infections and 21 deaths. A poll on Monday vindicated Ardern’s approach, with support for her Labour Party surging.
Now that the lockdown has ended, both the government and the central bank are forecasting a rapid recovery, with annualized growth resuming in mid-2021. The Treasury Department expects the economy to reach its pre-Covid size in about two years.
Economists caution that those projections appear optimistic, but say New Zealand was in a much better position than many others when the virus swept the world.
The government’s books were in good shape, with one of the lowest debt levels among developed nations at 19% of GDP. The economy was entering a recovery, wages were rising and the jobless rate was at a decade-low. This has given the government considerable headroom to fight the economic impact of the pandemic.
In its May 14 budget, the government unveiled a NZ$50 billion ($30 billion) rescue fund, taking total crisis spending to more than NZ$62 billion — a staggering 21% of the NZ$294 billion economy. The spending is aimed at preserving jobs while taking the opportunity to re-set the economy by re-training workers, investing in infrastructure and tackling systemic issues such as child poverty and housing.
“We had a fantastic starting position fiscally, and the economy’s starting position was great too,” said Stephen Toplis, head of research at Bank of New Zealand in Wellington. “So if we can come out of this, we will do well. And that scenario becomes even more viable if we can open the border with Australia.”
The two neighbors are in talks to form a travel “bubble,” which would significantly mitigate damage to their tourism sectors.
And there are other encouraging signs that Ardern’s safe haven isn’t just wishful thinking. Microsoft Corp last month announced plans to open a data center in New Zealand, while latest immigration data suggest that at least some of the many Kiwis living abroad are eager to come home.
Some 43,000 citizens came back in the year through March, the highest annual number on record, with almost half arriving since December, the statistics agency reported last week, though some may choose to leave again when travel restrictions are eased.
Shamubeel Eaqub, an independent economist at Sense Partners in Auckland, is skeptical that global companies will choose to set up large operations in New Zealand. Still, he said lockdowns have shown it’s “possible to do business from anywhere,” and some of those behaviors will probably persist.
“The more the uncertainties and health crises bubble away in other countries, the greater the chance that some people will choose to come here,” he said. “We can’t avert a recession, but right now, when everyone is staring down the barrel, just having these glimmers of hope is kind of nice.”
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