Wage Subsidies Still Playing on the Charts

The New Zealand (NZ) Post has recently received further over NZD 29 million in wage subsidies from the NZ government, besides NZD 280 million already allocated in Budget 2020. Due to rapidly falling mail volumes amid COVID-19, the state-owned enterprise has been under financial pressure in recent years, becoming commercially non-viable to maintain its existing service level.

The government has planned to fund NZD 280 million from two different sources - NZD 130 million from Budget 2020 and NZD 150 million via equity injection from its COVID-19 Response and Recovery Fund.

COVID-19 Fund to Prevent Job Losses

To mitigate the economic impact of novel coronavirus crisis, the NZ government has allocated NZD 50 billion for COVID-19 Response and Recovery Fund (CRRF) in budget 2020. In aggregate, the government provided support worth NZD 62.1 billion for coronavirus response and economic recovery in Budget 2020, comprising NZD 50 billion in CRRF and NZD 12.1 billion in Economic Response Package announced in March 2020.

This was the record ‘once in generation’ budget announced by the government in modern history to deal with ‘once in a century’ health shock.

The massive budget stimulus unveiled by the government is primarily targeted at controlling massive unemployment and prevent job losses. Focussing on employment, the stimulus aims to protect 140k jobs while lowering unemployment from an anticipated ~10 per cent to 4.2 per cent over the next two years.

NZ unemployment rate surged to 4.2 per cent in March 2020 quarter from 4 per cent in December 2019 quarter, revealed Statistics New Zealand in its latest statistics. Economists are anticipating a further deterioration in the labour market, with June 2020 quarter to reveal a clear picture of COVID-19 impact on unemployment, underemployment and hours actually worked.

Wage Subsidies Remain in Focus

To help businesses retain staff and project incomes and jobs during COVID-19 crisis, the government uncovered a wage subsidy scheme in March this year, that has helped more than 1.6 million individuals and paid out NZD 10.9 billion as at 29^th May 2020.

The government’s current wage subsidy scheme offers a 12-week payment to each named employee. Businesses that have witnessed a 30 per cent fall in actual or projected revenue amid COVID-19 can avail the wage subsidy scheme, expiring on 9^th June 2020.

Lately, the government extended the wage subsidy scheme for another 8 weeks from 10^th June 2020, providing a sigh of relief to SMEs struggling to pay wages to their employees. Businesses eligible for this wage subsidy extension need to have observed a 50 per cent fall in actual or projected revenue amid COVID-19 over the 30-day period immediately before applying for the extension.

Full-time employees (20 hours or more per week) availing wage subsidy scheme are being paid NZD 585.80 (gross) per week while part-time employees (less than 20 hours per week) are being paid NZD 350.00 (gross) per week.

Initially, the NZ government allocated a total of NZD 12 billion for the Wage Subsidy Scheme, throwing additional NZD 3.2 billion for extending the scheme further. In aggregate, the scheme costed NZD 15.2 billion to the government, representing 5.1 per cent of the GDP.

Wage Subsidy Scheme to Support Employment

The government expects wage subsidies to initially diminish the extent to which companies are expected to shed labour instead of spurring additional activity. Anticipations over a sharp fall in hours worked are quite high than paid hours and employment in June 2020 quarter amid wage subsidies’ influence on wage payments and employment.

In the full CRRF forecast, the government expects a more-rapid plunge in the unemployment rate in a bid to support employment. The unemployment rate is likely to peak at a little below 10 per cent in the September quarter, increasing from the June quarter in the wake of below-level activity needed to support better employment levels.

However, in the main budget forecast, the unemployment rate has been projected to reach ~10 per cent by September, gradually easing to ~8 per cent by mid-2021. The government notified that in case of moderated impact from COVID-19, unemployment rate is anticipated to fall back to about 5 per cent by 2021-end.

Employment Intentions Lift in May

The latest ANZ Business Outlook survey has revealed that employment intentions have revived slightly in May, with a net 42 per cent of firms anticipating to lower employment. Besides, profit expectations of businesses have improved from last month, with a net 56 per cent anticipating lower profits.

What’s worth noting is that economic activity has improved substantially with New Zealand moving to Alert Level 2 restrictions, enabling the opening of almost all of the economy. This is reflected in increased consumer spending and traffic flows, that are approaching back to levels seen prior to COVID-19 pandemic.

Additionally, NZ merchandise imports from China have increased in comparison to 2019 levels; however, exports remain lower. The improving economic conditions are driven by NZ’s fiscal and monetary policy initiatives, with its fiscal response to date being of a larger scale than some other developed countries.

With NZ on track to move to Level 1 restrictions by next week, easing of rules are further expected to spur domestic economic activity and boost consumer confidence. However, the movement to Alert Level 1 restrictions strongly relies on non-occurrence of unforeseen COVID-19 cases over the coming days.