Treasury’s COVID-19 economic scenarios

Treasury’s COVID-19 economic scenarios

The New Zealand Treasury has released the outcome of possible COVID-19 “lockdown” scenarios.


Key contact

Darshana Elwela

Partner - Tax

KPMG in New Zealand


The Government’s press release, inlcuding Treasury’s report is available here

The scenarios and economic impacts

At one end, Scenario 1, New Zealand is at COVID-19 Alert Level 4 for the minimum four weeks, followed by Alert Level 3 for a month and then a combination of Alert Levels 1 and 2 for another 10 months. Global GDP growth is assumed to be 6% lower than the December 2019 Treasury forecast (while a variant, Scenario 5, contemplates an even steeper drop in global growth).

At the other end, Scenario 3,  Alert Level 4 lasts for six months and Alert Level 3 for another six months.

A number of intermediate scenarios are also considered, where New Zealand moves between the various Alert Levels over short periods of time.

For March years, the economic impacts, compared to Treasury’s December 2019 forecasts, of the scenarios are: 

Impact on   Scenario 1   Scenario 3   Intermediate scenarios 
Real GDP Lower by 13.5% in 2021 Lower by 34% in 2021 Lower by between 15 and 27.5% in 2021
Unemploy-ment rate 9.5% by 2021, dropping to 4.5% by 2024 24.5% by 2021, dropping to 5.5% by 2024 Between 11 and 16.5% in 2021, dropping to 4.5 to 6.5% by 2024
Inflation Between 0% and 1.75% Between -0.75% and 1.5% Between -0.75% and 1.5%
Nominal GDP ($b) Lower cumulatively by $121 billion between 2020 and 2024 Lower cumulatively by $263 billion Lower cumulatively by between $150 and $217 billion


Impact of additional fiscal measures

These scenarios assume no further support from Government. Treasury has modelled an additional $20 billion for Scenario 1 and a $40 billion addition for one of the intermediate scenarios.

For Scenario 1, this has the effect of reducing the impact on GDP from -13.5% in 2021 to -11.5%. It also results in a lower unemployment rate of 5.5% by March 2021 (c.f. 9.5%). The cumulative impact is that GDP (in dollar terms) is $25 billion higher with the additional spend.

Some observations

  • The Treasury release is not a forecast. It models scenarios and emphasises the uncertainty.   
  • Based on the current trajectory of COVID-19 testing results, Scenario 1 seems to be the closest to a likely path. However, there is considerable uncertainty which means none of the scenarios can be ruled out. As Government and public health officials have routinely pointed out, much will depend on New Zealand staying the course over the remainder of the Alert Level 4 restrictions.
  • Scenario 1 assumes a one-month (four week) Alert Level 3 period. This is not (yet) a Government decision.  However, business should consider what a month-long Alert Level 3 period may mean for them. Equally, uncertainty means the other scenarios should also be considered.
  • Even scenario 1 will result in a sharp GDP hit for the rest of 2020 and some of 2021, before rebounding strongly in 2022 and out years. The actual impact will depend on how global economies, including New Zealand's key trading partners such as Australia, China, the UK and US, are affected by COVID-19 and for how long. Scenario 5 models a slower global recovery with corresponding worse coutcomes.
  • A key to mitigating particularly the unemployment impacts will be additional fiscal measures. Today’s release simply assumes a total spend. It does not detail the assumptions on how the spending would be phased (upfront or over time). The Minister of Finance’s speech later this week may contain further detail on this.
  • The Government has parliamentary authority to spend up to $52 billion for COVID-19. To date, the Government’s wage subsidy and other announced measures total around $20 billion. An additional $20 billion of Government spending would be within this total $52 billion “fiscal envelope”.  If a much larger package is needed, additional Parliamentary approval would be required.
  • The release of the scenarios and their possible impact is welcome. It provides some guidance on what may happen and so allows some thinking to be done.
  • However, there is no detail on different sectors – the modelling appears to be at a broad New Zealand economy level.  There is no particular guidance for sectors or locations.
  • The underlying data and modelling have not been released. This additional background information would be helpful. 

For more on the Government’s fiscal response to date and how your business can navigate COVID-19, please refer to our dedicated COVID-19 website.

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