The economic forecasts we got from the Treasury on Wednesday could be described as not so bad: not so bad as they were, and not so bad that they can't get worse.
It is a less grim outlook than in the pre-election economic and fiscal update three months agoand much less scary than in May's Budget.
The hit to economic output during the June quarter's lockdown was less than expected and the subsequent recovery has been swifter, encouraging the Treasury to conclude it had overestimated the impact of the various alert levels.
It turns out that it still underestimated the strength of the rebound in the September quarter, which came in at 14 per cent, when the Treasury had picked 10.5 per cent.
The upshot is that economic activity has already returned to pre-Covid levels of a year ago, when the Treasury had forecast that would not happen until early 2022.
The forecast also assumes no resurgence of the coronavirus. Complacency about infection risk may yet undermine that assumption.
Even so, the forecast that in per capita terms real gross domestic product would fall a cumulative 5 per cent as a result of the Covid recession now looks pessimistic.
That is admittedly a crude measure of the hit to productivity. But any decline is especially unhelpful given this reminder in the Treasury's briefing to the incoming minister, also released this week: "New Zealand's GDP per capita is about 30 per cent below the average of the top half of the OECD, where it has been since it settled in the mid-1990s. Labour productivity growth has slowed since the global financial crisis, with average annual labour productivity [growth] in the measured sector of 1 per cent between 2008 and 2019." The uncertainty-driven dearth of business investment — a cumulative decline of nearly 11 per cent over the two years to next June — will further stunt productivity.
The Treasury has lowered its forecast track for the unemployment rate. It is now expected to peak at 6.9 per cent by the end of next year, up from 5.3 per cent now but lower than the 7.8 per cent forecast three months ago.
But that is a headcount measure, which masks the impact of employers cutting hours, even while the wage subsidy was in place.
And while the Treasury is more confident than it was about the recession's impact on labour force participation — in other words, it expects fewer discouraged workers to drop out of the workforce — it still expects a degree of "scarring" in the labour market from skills mismatches, even as the recovery gathers pace.
It notes the unevenness of the Covid recession's impact, which has disproportionately hit the young, Māori and Pasifika, women and Aucklanders.
When asked about a policy response to that, Finance Minister Grant Robertson was noncommittal.
He pointed to existing programmes like the Mana in Mahi training scheme, subsidised apprenticeships and the flexi-wage scheme. But on the broader issue of whether the improved fiscal outlook would be "banked" as lower debt or would allow a rise in benefits, his line was that those were Budget decisions the Government would make in due course.
Even the broad brush indications of fiscal policy in the Budget Policy Statement, which would normally be released now, would have to wait until some time in the new year.
So would the Government's response to the advice it had sought on what to do about the housing crisis.
Finance Minister Grant Robertson. Photo / Mark Mitchell
The Treasury expects house price inflation to slow from its recent breakneck pace over the course of next year, as net migration remains constrained, housing supply increases and rising unemployment dampens demand.
But over the next five years it expects house prices to rise more than twice as fast as wages, supported by low interest rates and a recovery in net migration inflows.
The half-year economic and fiscal update also sketches a couple of alternative scenarios which reflect downside and upside risks to the central forecasts.
The downside one allows for resurgences of community transmission of the Covid-19 virus. It envisages three sporadic outbreaks widespread enough to require the reinstatement of alert level 3 for two weeks, followed by three weeks at alert level 2.
With the pandemic still raging beyond our shores, and given the constant chorus of calls to relax border restrictions for one reason or another, that is not a trivial risk.
The Treasury reckons it would shave a couple of percentage points off the expected rebound in economic activity next year, with private consumption and business and residential investment all lower.
The unemployment rate on this downside scenario would peak at 8.5 per cent, not 6.9 per cent.
It would require increased fiscal support, but there is still $10 billion set aside in the Covid Response and Recovery Fund for such an eventuality. Increased monetary policy stimulus is also assumed, on this scenario.
The alternative upside scenario is also plausible. It assumes the current momentum in economic activity is maintained into 2021.
It also assumes an earlier recovery in services exports, of which the most important is tourism, consistent with a transtasman bubble opening in the March quarter.
And it assumes higher — and therefore probably more realistic — house prices than the central forecast.
Confidence would be stronger, and indeed, the forward-looking indicators in this week's Westpac McDermott Miller consumer confidence survey rebounded to close to their long-run averages.
On this scenario, unemployment peaks at 6.2 per cent, not 6.9 per cent.
For Grant Robertson, the latest forecasts represent vindication of both the public health and fiscal responses to the Covid shock.
The Government's critics contend that similar — or what they consider acceptably worse — health outcomes could have been achieved at less cost.
But it is hard enough to tell what is true in the actual world, without being too dogmatic about other possible worlds which might have been better.
The critics are erecting an edifice of speculation on epistemologically boggy ground. Or in plain English: Coulda, shoulda, woulda? How do you know?
