April 14, 2020

Treasury’s post-COVID scenarios – How BERL can help to make sense of the numbers

A look at the Treasury scenarios for New Zealand’s recovery from the economic impact of COVID-19 and the public health response.

The Treasury scenarios for the COVID-19 recovery are biased towards preserving the status quo and signal a relatively quick rebound.

The virus will cause our ‘normal’ to change meaning that the status quo expected in Half Year Economic and Fiscal Update (HYEFU) will never happen and we will create a new ‘normal’. The loss of community infrastructure and networks require considerable effort and time to rebuild. The economic recovery will disappoint if we assume or expect a return to 'normal' fast.

It is not possible to quantify precisely in advance how effective policy support measures will be, or how business and consumer sentiment will evolve. How the international economy develops is also highly uncertain. As a small country a lot of our economic recovery will be influenced by what is occurring around the world.

It needs to be emphasised that any economic modelling or forecasting of the consequences of COVID-19 must be based on assumptions and best estimates. There is a need to be cautious about how much forecasting based on previous experiences and assumptions can tell us about what will happen in the future. 

Forecast economic responses are based on previous experiences, but these past experiences contain little or no precedent for the current situation and the policy responses being observed both domestically and globally. 

The COVID-19 pandemic is a once in a lifetime public health event. As well as impacting health the pandemic and the response have touched just about every economy around the world. To help government, local authorities, businesses, economists, not for profits, and the public plan for the future Treasury has developed five scenarios to illustrate the potential direction of the recovery to inform future strategies and policy responses.

The Treasury scenarios assume relatively quick rebound/bounce back. However, the level of economic upheaval and distress caused and changes in behaviour means that the old models need recalibration.

These Treasury models and scenarios are biased towards preserving the status quo and signal a relatively quick rebound. The virus will cause our ‘normal’ to change meaning that the status quo expected in HYEFU will never happen and we will create a new ‘normal’. The loss of community infrastructure and networks require considerable effort and time to rebuild. The economic recovery will disappoint if we assume or expect a return to 'normal' fast.

With the significant increase in unemployment there will be long-term scarring of individual’s and family’s abilities to participate in the upswing. This will undoubtedly slow the recovery (even under scenario one).

Business needs to re-form and re-engage their people and clients, people need to get household finances in order, children will need to get past upheaval of school attendance, families will need to sort childcare, these things don’t happen overnight. And if community supports are limited then this process will take longer.

These scenarios are top down and might not reflect the impact that it will have on your organisation, sector or region. BERL can help you to interpret, plan and structure the possibilities of what this might mean for you. For more information please contact our Business Development Manager Nadine Bowen.

With such uncertainty surrounding the outlook it means that economic forecasting has become more about illustrating the possibilities than predicting outcomes. Much depends on the success of measures to contain the virus and how quickly alert levels are reduced.

All scenarios begin with the reduction in activity we are experiencing and include the approximately $20 billion of fiscal support measures that have been announced to date. All scenarios also assume the borders are closed to inbound foreign visitors and services exports will fall to around one-third of their previous levels.

Scenario one

In Scenario one, Alert Level 4 is in place for the four weeks we are currently experiencing. The alert level is then lowered to Alert Level 3 for four more weeks. After those four weeks a mix of Alert Levels 1 and 2 continue for the next 10 months. This looks to be our current path if new infections continue to decline until 20 April when Cabinet makes its decision on the current lockdown.

The lockdown will see GDP fall by around 25 percent in the June 2020 quarter, followed by a 20 percent rise in the September 2020 quarter as the lower alert levels enable more activities to resume. The total loss of GDP over the March 2021 year is approximately 15 percent relative to HYEFU 2019 forecasts. 

The unemployment rate will rise to 13 percent in the June 2020 before easing as restrictions are lifted and more activity occurs.

If the spread of COVID-19 is contained and a vaccine is developed by the June 2021 quarter Treasury forecast a further pickup in activity as confidence improves and international visitors begin to return.

In this scenario activity continues to recover and returns to its previous path in the June 2024 quarter. The recovery reflects the disruption caused to the economy. Falls in international tourism, for example, are assumed to lead to services exports still being around 10 percent below previously forecast levels by 2024.

Scenario two

If the current lockdown is not successful Scenario two assumes three months is spent at Alert Level 4, with the remaining months of the 12-month period in Levels 1 and 2. The time in Alert Level 4 could cover several shorter periods if there are flare ups of cases.

If this occurs the fall in June quarter GDP will be around 40 percent, followed by a much larger rise in the September quarter compared to Scenario one. The real GDP in March 2021 will be approximately 21 percent below HYEFU 2019 forecast. Unemployment will increase, reaching 18 percent in the June 2020 quarter. 

Scenario three

Scenario three assumes that Alert Level 4 and Alert Level 3 both last six months each over a 12 month period. This produces the worst GDP and unemployment outcomes of the scenarios Treasury considered. Compared to HYEFU 2019, real GDP in the year to March 2021 is estimated to be approximately 35 percent lower, with the difference to 2024 around 14 percent lower. The unemployment rate rises to almost 25 percent by the end of 2020, before easing in the June 2021 quarter once restrictions are limited. 

Scenario four

Scenario four is an intermediate case, sitting between Scenarios two and three. Scenario four is likely where the Alert Level initially de-escalates, but is later re-escalated if cases increase again. 
The impacts on output, employment, and GDP are considerably less negative than Scenario three, but more negative than Scenario two due to the time spent at each alert level and the activity allowed at each level. 

Scenario five

Scenario five uses the same alert level assumptions as Scenario one but assumes a larger contraction in world output and a slower recovery. This would be the result of stricter or longer international public health interventions with more effect on businesses, labour markets and households.

The weaker world has a greater impact over the medium term. Weaker world demand weighs on New Zealand’s income growth, with reduced exports and domestic investment demand. The economic recovery and the increase in employment is more gradual.

Additional policy responses

In addition to the five scenarios Treasury have also included the impact of additional policy measures beyond the support already announced. This additional support flows to activity, income and employment. Scenario 1a assumes an additional $20 billion in fiscal spending directed to households and businesses. Accounting for the effect of the restrictions in place, limiting the impact the additional investment by government would limit the rise in unemployment to less than 10 percent and reduce the loss in nominal GDP by around $20 billion. 

If there was further support, Treasury forecasts that activity would pick up from the September quarter and unemployment would decline more quickly during 2020.


The shock being experienced is widely recognised as greater than the 2007/08 global financial crisis. In response to the COVID-19 outbreak, governments around the world have implemented large health and economic support measures. As expected economic activity in New Zealand has fallen as a result of the lockdown, as illustrated by the 14 April Treasury Weekly Economic Update.

The future of our economy is uncertain. What is clear is that whatever path the global and domestic economies follow, the effects of COVID-19 will be severe and long lasting. Activity levels in some sectors, notably international tourism, may take many years to recover. Income will be lost for many businesses and households, and the economy.

The future of our economy is uncertain.

The magnitude and duration of the recovery depends on many unknown factors, including the course of the virus, how long restrictions are in place, how quickly the global health and economies recover, how behaviours might change, and how successful government policies are in supporting the wellbeing of nations, regions, communities, firms, households and individuals.

As the public health risks decrease, and restrictions ease, global and domestic economies will begin to recover, supported by the government packages. The timing and pace at which this happens is unclear, and will be very different domestically and internationally depending on how countries respond.