It seems very probable that the rate of growth in the New Zealand economy will decrease as a result of the COVID-19 (Coronavirus) outbreak.

At the time of writing, most of the cases are in China, but the virus is, evidently, spreading to other countries. The disease will inevitably have a negative effect on New Zealand’s exports, including tourism earnings, and trade with China is already being adversely affected. There is concern that slower economic growth associated with a reduction in trade will cause employment to grow more slowly than it is already.

Even worse, a spread of the disease to New Zealand would probably magnify the slow down. Added to fears about what the disease could do in terms of illness and death, there is a clear risk that the employment growth rate, which has been positive for the past 5 years, will turn negative.  That is to say, employment levels will start to fall.

The graph below is based on data from Statistics New Zealand. It indicates that the rate of growth in employment has been on a downward trend for some time.  Employment is currently growing at an annual rate of around 1 percent a year, which compares with a rate of around 3 percent in mid-2016 to early 2017.

The red line shows the rate of growth in the number of people in employment, as measured by the Household Labour Force Survey (HLFS). This appears to have revealed a large surge in the growth rate between early 2016 and early 2017, peaking at a growth rate of almost 6 percent a year. However, the Treasury believes that the HLFS data overstated the growth, and that the actual growth rate did not exceed 4 percent a year during that period.1 The brown line in the graph reflects how the Treasury viewed what really happened to employment.

The yellow line shows the rate of growth in the number of filled jobs, as measured by the Quarterly Employment Survey (QES). The QES is a slightly different measure of employment (i.e. filled jobs, rather than people employed) and, unlike the HLFS, it doesn’t cover all sectors of the economy, but it has provided what many people believe is a more reliable picture of how employment growth has changed. Like the HLFS, however, the QES has indicated that the rate of growth in employment has been on a downward trend since about the middle of 2017.

There is a clear risk that the employment growth rate, which has been positive for the past 5 years, will turn negative.  That is to say, employment levels will start to fall

Whatever way it is viewed, recent employment growth has been disappointingly slow. Moreover, looking ahead, the GDP growth rate seems unlikely to be much above two percent a year in the short term. And the major business surveys, e.g. the QSBO and the ANZ Business Outlook, were indicating that, even before COVID-19 was widely known about, employers were cautious about taking on additional labour.

No wonder then that the Government has preferred to emphasise the fact that the unemployment rate remains low. For its part, the Opposition argues that this is because a considerable number of people have left the workforce, while not drawing attention to the fact that the slowdown in employment growth started before the last General Election.

General Election campaigns often feature employment as an issue, but this time could well be different. A global COVID-19 pandemic would make all other issues pale into insignificance. 

1 See the Special Topic in the July 2017 edition of the Treasury’s Monthly Economic Indicators report.