So there we have it – the 2020 Government budget – and there are no surprises. The Government’s approach is to flood the economy with money in order to keep businesses afloat and save jobs. Treasury’s view seems to be that we will have a ‘V-shaped’ recession – that is, a sharp decline followed by a reasonably rapid recovery. However, other economists consider this to be an optimistic view and are expecting a ‘U-shaped’ recession, with a longer recovery period. While the outpouring of money will result in huge increases in Government debt, our pre-COVID debt levels were low in comparison with other significant economies. At some point, this debt will have to brought back into line through reduced spending and/or increased taxes, but that is a long way off. There may however be increased pressure to raise the age of eligibility for NZ Superannuation to decrease Government spending.
As we saw in response to the Global Financial Crisis, pouring money into the economy tends to have an inflationary impact on asset prices. This was evident in the rapid rise of the US share market after the Federal Reserve Quantitative Easing programme. Money needs to find a long-term home, and it certainly won’t be in the bank, where interest rates will stay low for a very long time. Will they go lower? That’s a possibility but an unlikely one.
While property prices are expected to take a dip later this year due to higher unemployment and lower net migration, there will be some upward pressure on prices. Banks will be cautious about lending on new property developments in the short term and this will impact on the supply of housing.
There is still a high level of uncertainty in all areas of investment and a wait and see approach is wise.