What does economic life look like post Covid-19 lock down?

29 March 2020

All businesses are currently planning for the financial effect of the April Lockdown and the savage loss of income.

All businesses we are working with are addressing the key biggest costs:

Wages What to do about wages costs in April and beyond

Interest & Principal Repayments What to discuss with the banks regarding interest and debt repayment relief.

Rent Discussions with landlords regarding rent remission and payment deferrals.

Most businesses have had the benefit of a wages subsidy to offset the loss of income caused by the Covid-19 lockdown, but that receipt is a small amount of the overall losses businesses will be facing in the upcoming period.

In addition, we are awaiting advice regarding the The Business Finance Guarantee Scheme that was announced last week but has been conspicuous in its lack of details since the initial announcement.

This Business Finance Guarantee Scheme will be essential to the survival of many businesses.

The future

The bank economists are now contemplating what Covid-19 and the lockdown is likely to do to our economy over the next couple of years.

We have never experienced business conditions like this - not in the depression nor in war.

Two major banks expect New Zealand's gross domestic product (GDP) to contract by about six percent this year as a result of the coronavirus pandemic.

A senior economist at the ASB, said the economy was heading for a deep, but short-lived, contraction and that will cause the economy to shrink by around 6 percent of GDP over 2020, ANZ was last week forecasting a 3 to 4 percent contraction but now expects a 5 to 6 percent fall.

Their forecasts reflect the fact that New Zealand will be in lockdown for at least four weeks.

We now expect GDP to fall by 5-6 percent over 2020, but the drop is now heavily front-loaded into Q2.

"And activity at the end of the year under these forecasts is running about 8 percent below the previous trend seen at the end of last year," ANZ said.

It seems more likely than not that quarterly movements in New Zealand GDP will be massive - but hopefully short-lived- with easily the greatest quarterly volatility seen on record.

ASB expect the economy to recover, but it won't be until late 2022 that NZ economic activity is above late-2019 levels.

ASB believe the Reserve Bank's official cash rate, currently set at 0.25 per cent, is unlikely to move higher until 2024.

At the start of the year, ASB was expecting 2020 to be a very good one for the domestic housing market. Now it expects nationwide house prices to be around 5-6 per cent below their likely March 2020 peak.

Our recommendations

Redo your March 2021 budget and forecast showing a decline in Revenue of between 6-15% (or more depending on your industry and expected effect of the lockdown and your ability to recover lost revenues) compared to 2020 results.

Understand your funding requirements with reduced turnover and sure up funding lines as quickly as possible. The current volatility could place pressure on credit availability in the future.

Identify an action plan and sequence of steps necessary to reduce costs once post lock down trading conditions become clearer.

Don’t hesitate to contact your advisor if you have any queries.

Disclaimer:This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.

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