New Zealand Institute of Economic Research (Inc) Media Release Embargoed until 1am, Thursday 18 June 2020
In an Insight released today, NZIER assesses the sectoral impact and policy implications of government spending in the COVID-19 recovery.
New Zealand has managed the COVID-19 outbreak with relative success, in terms of containing infection rates and deaths. This has seen New Zealand move down alert levels over the past few weeks as we achieved zero active cases, with restrictions relaxed but the border closed. However, the impact of the outbreak on the economy is undeniable.
Activity indicators show a rebound in demand as New Zealand moves out of lockdown, but the effects have been uneven across the industries. This unevenness will affect the recovery ahead. “Although there has been some recovery in retail spending as lockdown and social distancing restrictions were relaxed, uncertainty over income prospects will likely weigh on spending over the longer term,” says Christina Leung.
“In contrast, the impact of the outbreak on demand for export commodities has been modest and varied” says Christina Leung, “People around the world are focusing their spending on necessities such as food, from which New Zealand being a major producer of meat and dairy is benefiting.”
This shift in demand will have implications for Government spending as it looks to support the recovery ahead, with spending that targets the most affected areas likely to bring most bang for buck. Any new Government spending will come with costs and benefits. “Undisciplined spending is likely to prolong New Zealand’s recovery, as it crowds out private sector investment” says Christina Leung.
“We suggest that the Government focuses on spending which builds sustainable capability, such as high-quality infrastructure and worker training. A key challenge with large scale infrastructure investment is the lag time it takes for the project to get started. Managing the lags in activity will be important in supporting a sustainable recovery for the coming year.”