The economy detectives

As Covid-19 hits growth, Liam Dann asks: Where do economists loook for clues on what lies ahead?

This time a year ago, when we polled economists about the indicators that gave them the best picture of the economic outlook, their top picks were: interest rates; house prices; trade war; commodity prices; and business confidence surveys But the Covid-19 pandemic has radically moved the goalposts for forecasting.

As we head into certain recession in the coming months, the question now becomes: how deep?

Here are the key indicators that economists are watching for clues to help answer that question, and forecast the state of the Covid-19 economy.

CASE NUMBERS

“Number one has to be has to be unexplained coronavirus cases,” says ANZ chief economist Sharon Zollner.

The duration and severity of the pandemic is providing the biggest uncertainty for economic forecasting right between “There now. slow is a but world steady of difference progress out of lockdown and having to reverse,” says Zollner. “New Zealand and Australia are in a much better position than most countries in that regard but it could still go wrong.”

Progress in China will also have a big influence on our economic fortunes.

Jobseeker data

Unemployment was so low for so long, it had almost dropped off the radar of important indicators for local economists. Now, sadly, it’s back, big time.

“We need to get an idea of the [structural] impacts in the post-Covid world,” says Kiwibank chief economist Jarrod Kerr.

“How many jobs have been saved by the wage subsidies? How many jobs are lost forever? How well do we retrain into areas of need, like construction?”

For now, the quarterly Stats NZ unemployment number is too far in the rear view mirror to offer any guidance (the figure for the first quarter was just 4.2 per cent).

So the focus goes on Ministry of Social Development (MSD) Jobseeker benefit data.

That shows there were 184,404 people on a Jobseeker benefit at the end of April — a jump of 32,600 in just a month.

ANZ’s Zollner notes also that the bank’s monthly Business Outlook survey has a new question about whether firms have more or fewer staff than a year ago.

“That should be a very timely indicator of the extent to which fiscal efforts have saved jobs or merely deferred the inevitable,” she says.

NZIER principal economist Christina Leung adds that the monthly online job ad figures will also provide an indication of firms’ willingness to hire over the coming year.

House prices

This indicator never goes out of fashion in New Zealand. The wealth effect of house prices cushions us from high debt levels and keeps us spending.

House prices are “still a key indicator of confidence in the economy, and implicitly captures households’ expectations of income ahead as well as banks’ willingness to lend,” says Leung.

Zollner notes that house prices are higher — relative to incomes — than they were when the last crisis hit in 2007. But it is still highly uncertain how “ugly” things will get, she says.

So far prices are holding up, due largely to a lack of listings and sales. But many economists expect them to fall by between 7 and 10 per cent.

Business stress

The most telling sign of the stress on the business community will be how many companies go into bankruptcy, says ASB chief economist Nick Tuffley.

Independent economist Cameron Bagrie also recommends keeping an eye on commercial leasing data for signs of how much slack there is in the market, as businesses either shut up shop or pull back on expansion.

Retail sales

Consumption is still about 60 per cent of the economy, Zollner notes.

Retail sales data is also widely collected and turned around quickly via a range of sources such as electronic card transactions.

That makes it a useful early indicator of consumer confidence and changes in behaviour.

“Details over what households are spending on would be useful to gauge the shift in the mix of spending, for example from leisure activities to groceries,” says Leung.

Traffic flows (and other real-time indicators)

The key is how we are tracking relative to pre-covid levels, says Bagrie.

Gareth Kiernan at Infometrics notes that heavier vehicle flows are more useful than the light vehicle measures, “which are largely influenced by household movements, and which are probably nowhere near any new ‘normal’ even at Level 2.” At alert level 3, Auckland heavy vehicle flows were back up to around 70 per cent of levels seen late last year, says NZIER’s Leung.

“This is encouraging and suggests demand is recovering as the physical

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“It gives an amazing read on what is really happening in the economy,” he says. “During the lockdown, electricity demand was about 15 per cent below yearago levels, but it is now back to slightly above year-ago levels.

“That actually suggests that the economy has rebounded better than we gave it credit for.”

Global demand

ANZ’s Zollner says commodity prices remain vital to our recovery.

“The world’s ability to pay for our topquality food has taken an enormous hit; we have to be realistic about that. But at the same time, global food supply chains are getting very strained, putting upward pressure on meat prices in some very large markets. To what extent will that cushion the blow for New Zealand producers?” eye such savings share Bagrie on as: prices. the rates; US also global consumer yield recommends scene curves; confidence and and indicators keeping bank and an watching Infometrics’ “Obviously Stats there’s NZ’s Kiernan weekly been says plenty export he’ll be of data. hope that (rather our than position industrial as a food commodities) exporter puts us in relatively good stead,” he says. “There’s also the hope that China does better than parts of Europe or North America are shaping up, which means that our export linkages and reliance on China turns out to be more of a blessing than might have appeared the case back in January.”

Fiscal strength

Finally, with a view to the long term recovery, the NZ Initiative’s Oliver Hartwich says he’ll be looking to indicators with implications for our longterm fiscal sustainability.

“On the one hand, that is government debt (both in absolute terms and as a percentage of GDP),” he says. “On the other, it is our credit ratings.”

"How many jobs have been saved by the wage subsidies? How many jobs are lost forever?"

Jarrod Kerr, Kiwibank