Economic Week - May 15

by Nick Clark

Budget 2020: Rebuilding Together

The Budget was obviously the biggest economic news for the week.  The king hits being suffered by the economy needed something extraordinary and the Government’s response has certainly been super-sized.  Whether it does the business though remains to be seen. 

The feature was a $50 billion Covid-19 Response and Recovery Fund, on top of the initial $12 billion rescue package announced in March and the $12 billion infrastructure package announced in January. This is a huge response although much of the money has yet to be committed so it is hard to say how effective it will be, especially for the longer-term recovery.  What is clear is though is that it will provide the Government with a formidable war chest for the coming months.

Operating spending will jump this year (2019/20) by $27 billion to $114 billion ($38.7% of GDP), while operating revenue will fall $4 billion to $89.5 billion.  From then on operating spending is forecast to be held relatively stable in nominal terms for the next few years (falling to 30.2% of GDP), implying a degree of firm control of spending.  Operating revenue will drop a bit further in 2020/21 before recovering with the economy. 

The operating balance before gains and losses will blow out to $28.3 billion this year (2019/20) and there will be similarly sized deficits over the next two years (2020/21 and 2021/22).  Deficits are then forecast to drop but surpluses are not forecast to return until 2027/28.

With years of large operating deficits ahead combined with large increases in capital investment, net government debt will surge from $58 billion to $201 billion (or from 19.0% of GDP to 53.6% of GDP). As a percent of GDP, New Zealand’s government net debt will still be low by international standards.

From a farming perspective it was most heartening to see the announced $1.1 billion environmental package, with:

  • $433 million for regional environmental projects e.g. restoring mini-wetlands, stabilising riverbanks, removing sediment, and providing for fish passage.
  • $315 million for biosecurity, including weed and pest control:
    • $148 for pest control eradication, including Predator Free New Zealand
    • $27 million to control wallaby populations
    • $40 million for pest and weed control in rivers and on Crown land.
    • $100 million for control of wilding pines.
  • $200 million for Department of Conservation Jobs for Nature Fund.
  • $154 million for jobs enhancing biosecurity on public and private land, mainly through QEII Trust, Landcare Trust, regional councils, and landowner groups.

We also welcome the intention to boost infrastructure spending but the decisions on where the money will go are yet to be made.  There was precious little mention of rural infrastructure in the Budget, but we still think there is a strong case for enhanced rural broadband and cell-phone coverage, more on-farm and community water storage, and rural and regional road improvement and maintenance.  These enablers should be prime candidates for investment as both will help drive primary sector productivity and competitiveness as well as better economic and social outcomes for rural communities.  We will continue pushing for them.

The Budget’s provision for re-training and other support for those New Zealanders who will be among the forecast 10% unemployment queue by next month is also positive. Federated Farmers set up its own apprenticeship scheme to find more workers for the dairy industry and we are looking forward to seeing more support now for this and other similar schemes to get people into primary sector jobs.

However, the huge forecast deficit for this year and for the next two years and the massive increase in government debt are concerning. The fiscal forecasts suggest a way out of the Covid-19 hole over the next several years, but they are strongly dependent on whether the economy really will bounce back as forecast, which if it does not will have big implications for government revenue, spending, and debt. 

Another big risk is whether the control of operating spending implied in the latter years of Budget forecasts transpires.  To mitigate the latter risk, it will be important for the Government to prioritise its spending continuously and relentlessly, focus on value for money, and resist inevitable pressure to keep spending more and more.  This will be a huge challenge.


Reserve Bank holds the OCR but ramps up asset purchases

The Reserve Bank this week kept the Official Cash Rate unchanged at 0.25% but expanded its large-scale asset purchase programme limit to $60 billion, up from its previous limit of $33 billion.  Neither decision was a surprise.

The Reserve Bank’s central economic forecast is for a 22% slump in June Quarter GDP followed by a rapid rebound, so GDP ends up being down ‘only’ 4.5% at the end of 2020 compared to the end of 2019.  It also expects unemployment to peak at 9% followed by a rapid decline, and mild annual deflation of -0.4% in early 2021.  The Reserve Bank considers the balance of economic risks to be on the downside (i.e., outcomes are more likely to be worse than better). 

The expansion of the Reserve Bank’s asset purchase programme should further reduce the cost of borrowing, but it is also prepared down to track to consider additional monetary policy tools.  These include adding other types of assets to its purchase programme, providing fixed term loans to banks, and reducing the OCR further potentially into negative territory.

The OCR is next reviewed on 24 June.


Covid-19 slams retail

Retail sales were nearly halved in April 2020, according to Statistics NZ’s monthly Electronic Card Transactions. April 2020 had the largest fall in both dollar terms ($2.6 billion) and percentage change (down 47%) since the series began in 2002.

Statistics NZ noted the $2.6 billion drop as equivalent of each person in the country spending about $520 less in April than they did in March.

Furniture, hardware, and appliances was the sector with the biggest fall in value, down more than $1 billion (or 72%).  However, hospitality sales (e.g., accommodation, cafes, and restaurants) had the biggest percentage fall, down 93% (or $721 million). 

Grocery sales had the smallest percentage decline, down 11% (or $275 million).  80% of total retail sales in April were for grocery sales.


A little less terrible

Business confidence is improving but remains in the depths according to ANZ’s preliminary data for its May Business Outlook Survey.

A net 46% of respondents expect economic conditions to worsen over the coming year, a 21- point improvement on April’s miserable result. Meanwhile, a net 42% of respondents expect their own activity to reduce, a 13-point improvement. 

All forward-looking activity indicators lifted from April’s survey, but they remain extremely weak and backward-looking indicators are deteriorating.  For example, compared to the same month last year, a net 61% of firms reported lower activity and a net 36% reported having fewer employees.   Pricing and cost indicators remain very subdued.

The full-and-final results for the May survey will be released at the start of June.


Slump in visitors

March 2020 saw the largest-ever drop in monthly visitor arrival numbers, ahead of the Covid-19 lockdown, according to Statistics NZ’s monthly International Travel Statistics.

There were 175,500 visitor arrivals in March 2020, down 202,700 (or 54%) compared with March 2019.  April will be even worse with visitor arrivals likely to have dropped to near zero.


Kiwis coming home and staying home

Year ended March 2020 saw a net migration gain of 71,500 on the back of a big increase in New Zealanders coming home and fewer departures, according to Statistics NZ’s monthly International Migration Statistics

There were 157,200 (± 1,500) migrant arrivals, up 12.7% on the previous year and 85,800 (± 1,100) migrant departures, down 4.7%.  The annual net migration gain of 71,500 (±1,700) was up from 49,600 (± 200).  Very unusually, more New Zealand citizens arrived home (42,800) than left the country (35,700).


Banking Survey thank you

A big thanks to the 1,348 farmers who responded to the May 2020 Banking Survey.  Research First is now analysing the data and we expect to release the results at the end of May.


NIWA Soil Moisture Data

NIWA’s latest year (as at 9am Thursday 14 May) show soils continuing to be much dryer than usual across most of the North Island, but especially in Northland, Auckland, Thames-Coromandel, Bay of Plenty, Gisborne, and Hawkes Bay.  In the South Island the Christchurch and Selwyn areas getting very dry compared to usual conditions.

Exchange Rates

Over most of the week past the NZ Dollar held up, but it fell on Budget day, leaving it down for the week against the TWI and against all our key trading partners. 



NZ Dollar versus

This Week


Last Week (7/5/20)

Last Month (14/4/20)

Last Year (14/5/19)

US Dollar





Australian Dollar










UK Pound





Japanese Yen





Chinese Renminbi





Trade Weighted Index





Source: Reserve Bank of NZ


Wholesale Interest Rates

Over the course of the week the 90 Day Bank Bill interest rate was up 2 basis points to 0.28% but the rate for 10 Year Government Bonds was down 21 basis points to just 0.49%. The OCR is scheduled to next be reviewed on 24 June.



This Week


Last Week (7/5/20)

Last Month (14/4/20)

Last Year (14/5/19)






90 Day Bank Bill





10 Year Government Bond





Source: Reserve Bank of NZ