The slump that never happened: Auckland set for quick Covid-19 recovery

Auckland is likely to bounce back faster than many have presumed, Auckland Council’s chief economist David Norman says.

The city had been doing “exceptionally well” pre-Covid-19 so the recovery will likely be swifter.

Norman points out the Covid-19 response was man-made and not about the fundamentals of the economy being weak.

“This wasn’t about the economy being in a precarious position pre-Covid, this was a measured decision to trade off economic activity against saving lives and not overwhelming the health system.”

Norman, who has just released his quarterly economic report, told OneRoof he is not downplaying the loss of jobs which have followed, but says now the tap has been turned back on a lot of the fundamentals remain.

This means there will be a much more rapid recovery than, for example, after the Global Financial Crisis, when the fundamentals were weak.

“There were dodgy lending practices (in the GFC) and credit ratings sweeping parts of the world and that meant you had a real weak foundation, and that’s the difference.

Through the worst of it

“I don’t see three-and-a-half years of really tepid growth like we saw with the global financial crisis.

“We’re already through the worst of this to the extent that Level 4 cut economic activity by about 40 per cent, and in Level 2 we were only down seven or eight percent, maybe 10 per cent, so we’re already able to do a lot more economic activity even than two months ago.

“Just purely the maths of that means that when we look at this in a year’s time we will see this June quarter will be the worst quarter because it’s the one where we stopped doing things, and the quarters after that are quarters of recovery.”

In his report, Norman says pre-Covid, Auckland had the lowest unemployment since the GFC and a construction-led boom with house prices in Auckland up 11 per cent in a year and retail growth strong.

“Two months later, the world economy and our daily lives were brought to their knees by the global Covid-19 pandemic.”

While the GFC and other recent global downturns and national disasters can teach lessons, the comparisons are limited, he says.

Like now, the GFC saw the first casualties in the mainly lower-paid discretionary retail and tourism/hospitality industries, but because New Zealand has the virus under control there will be a resurgence of economic activity not possible after the GFC.

“It will help that our two biggest trading partners – China and Australia – are also recovering rapidly from the pandemic.”

Time to recover

The SARS outbreak in the early 2000s also hurt the tourism industry badly but in the calendar year 2003 global passenger numbers still rose by 2.3 per cent and the next year surged by 13 per cent.

Even the earlier 9/11 attacks and the burst of the dotcom bubble combined saw just a 2.8 per cent decline in two years, Norman says.

The Christchurch earthquakes are the only national disasters to come close to Covid 19 in direct costs. A criticism then was the slow recovery pace of anchor projects, but from that people have learned that going early and hard applied to not just the saving of lives but also of getting going again afterwards.

Unemployment, however, has surged and churn in employment will be significant as many businesses disappear but the Government’s stimulus will help, as will opening the border to Australia and further trusted nations.

The biggest change, Norman says, will be the limits on immigration from countries like China, India, South Africa and the Philippines, and he says the housing and construction market will take time to re-establish.

“How will a bank know what a house is worth post-lockdown? There may be several months of limited credit access while banks prioritise borrowers with more equity.”

While house prices will fall, this won’t be by as much as some suggest and probably in the 5-7 per cent range when the mortgage holidays end in October or November, he says.

But developers will wait to see what happens to the market and new resource and building consents will be down significantly over the next six months.