City of Sails becalmed but economy resilient

Takeaway pizza and coffee for the City of Sails on Wednesday? Hopefully. If Auckland shifts to level 3 at midnight on Tuesday, the city will have had five full weeks of level 4 lockdown. Although the epidemiological outcome of the elimination strategy remains uncertain, we are now in a position to assess its effect on the economy.

As professional investors, we keep a close eye on the individual companies in our portfolio, and use that information to assess how different parts of the economy are faring in real time.

Before this latest lockdown, it’s fair to say that the overall economy was at full steam. Economic growth was strong, and accelerating. Unemployment had fallen all the way back to 4 per cent and the consumer was in the mood to spend. Our biggest concern was the possible effect of impending interest rate hikes as the Reserve Bank looked to the Official Cash Rate as its preferred tool to adjust the level of stimulus in the economy.

The strong momentum was coupled with a more confident mindset when lockdown hit.

Although consumer spending slumped on lockdown, this time around card spending dipped 37 per cent compared to a 61 per cent dip in May 2020, according to data from the BNZ. While the hospitality and leisure industries have been hit hard once again, the surge in broadband usage indicates many businesses and households transitioned to an online environment more smoothly than they did 18 months ago.

Other high frequency indicators of activity, including the light traffic index and business confidence data, are also suggesting that the economy has suffered much less this time around.

Prior to this lockdown, many businesses were complaining of labour shortages, making it less likely that they will readily cut staff in the short term.

Large corporates, including Fletcher Building, which made significant job cuts in the first lockdown, have confirmed they will be retaining all staff this time – and although total Jobseeker payments increased, the rise has been much more modest than it was in 2020.

The latest outbreak has seen Auckland held in level 4 whilst the rest of the country is at an ‘enhanced’ level 2. Although this allows much of the economy to get back to business, it does introduce some novel problems. For example, the supply of construction materials has been hampered, as many distribution or manufacturing facilities are based in Auckland.

The Government estimates the broader business cost of having a border around Auckland at $50 million a week. On the flipside, the supply of consumer goods has been enabled by distribution centres based outside of Auckland. The surge in online orders from Auckland’s lockeddown consumers has been fulfilled by level 2 workers outside of the Auckland border.

If Auckland moves down the alert levels in the coming weeks, what are the implications for the economy?

Early feedback from fast food operators suggests that the surge in demand following the shift out of alert level 4 across most of New Zealand has been more muted this time around. This likely reflects a shorter lockdown period. In contrast, Auckland’s surge may be perhaps even greater than what we saw last year.

Most of the corporates we speak to are optimistic they can recoup the lost demand if activity remains buoyant over the next six months. However, that optimism is not universally shared. Changes to level 2 protocols have unfortunately rendered many hospitality businesses unviable and unless government support is forthcoming, these businesses may yet fail.

Faced with repeated challenges, many New Zealand businesses have shown themselves to be resilient and flexible. The wider population has exhibited similar traits, but stamina appears to be waning.

Hopefully, this will be the last major restriction on activity for New Zealand. If it is, signs are that much of the nation will pick up from where we left off.

With rapid vaccination programmes offering a light at the end of the tunnel, we remain optimistic that this lockdown, while severely affecting many individual businesses, need not derail the broader economic recovery.

Changes to level 2 protocols have unfortunately rendered many hospitality businesses unviable.