Treasury believes unemployment near its peak, with strong economic growth ahead

Thursday, 20 May 2021

The Treasury expects GDP growth to reach 4.4 per cent in 2023

The economy will recover from the Covid pandemic much faster than previously expected with a much lower peak in unemployment, Budget forecasts predict.

The Treasury is now forecasting unemployment will edge up from 4.7 per cent in the three months to the end of March to rise to 5.2 per cent this quarter and peak at 5.3 per cent in the September quarter, before gradually dropping back to 4.2 per cent in three years time.

It had previously forecast in December that unemployment would peak much higher, at 6.8 per cent during April to June next year.

Finance Minister Grant Robertson said those figures indicated “an extra 221,000 people” would enter employment over the next four years.

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He noted that at the time of last year's Budget, the Treasury had been expecting unemployment to reach nearly 10 per cent.

“Many economists were saying it would take until 2023 for the economy to return to previous levels.”

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But the economy had instead proved to be remarkably resilient in the face of what he described as a “one in 100 year” shock.

Robertson said annual economic growth was expected to average 3.4 per cent over the next four years.

The Treasury is now expecting GDP to rise 2.9 per cent in the year to the end of next month, 3.2 per cent the following year, and a huge 4.4 per cent in the year to June 2023.

In December, the Treasury had been forecasting growth of 1.5 per cent, 2.6 per cent and then 3.7 per cent during those years.

Finance Minister Grant Robertson says public consultations will begin later this year on an “ACC style” insurance scheme designed to protect people’s income for a period, if they lose their jobs.

Infometrics economist Brad Olsen described the new numbers as “a substantial upgrade to Treasury’s forecasts”.

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Concerns that inflation could get out of hand during the domestic and global recovery from Covid do not appear to be shared by the Treasury.

It is predicting annual inflation will rise to 2.4 per cent in the year to June, before falling back to hover between 1.7 per cent and 2.1 per cent during the following four years.

Robertson said the Government would be consulting the public later this year on a social unemployment insurance scheme which was being developed “at the urging of BusinessNZ and the Council of Trade Unions”.

The scheme is expected to see workers and employers pay a proportion of workers’ income into a fund that would provide them with an income linked to their previous pay, for perhaps a year or two, if they were made unemployed.

“The working proposal at the moment is an ‘ACC style scheme’ that provides 80 per cent cover with minimum and maximum income caps on a time-limited basis linked to training opportunities,” Robertson confirmed.

That kind of scheme was very common around the world and would deliver on a Labour manifesto commitment, he said.

It would avoid the need for “ad hoc” support to be provided when people lost their jobs “and links the loss of work to new training opportunities”, he said.

E tū assistant national secretary Annie Newman said it supported the Government prioritising the initiative, describing it as “long overdue”.

“Covid reminded us again how important it is to support people as they move in and out of work,” she said.

Robertson said business investment, which has dropped sharply during the pandemic, was forecast to grow at nearly 6 per cent a year over the next four years.

“Wage growth, at nearly 3 per cent a year, will outpace inflation, meaning more money in Kiwis' back pockets,” he said.

Robertson said the stronger economic position would mean some people would argue the Government should take on more debt, but said “a balanced approached” was needed.

“Despite our success, the impact of Covid is still very present,” he said, pointing to the impact of new variants of the virus and the pandemic situations in India and Fiji.

“Every economic forecast, no matter how positive, is accompanied by frequent use of the words 'uncertainty' and 'volatility',” he said.