An end to fees-free tertiary education and an increase in the pension age may be needed as New Zealand recovers from an economic hit that could push 240,000 more people into unemployment, ANZ says.

Its economic research team has released its latest Quarterly Economic Outlook, in which it said the economic slump New Zealand was experiencing was "truly enormous".

At alert level three, which New Zealand will shift to next week, about 10 per cent to 15 per cent of work would still not be able to happen.

Productivity would be diminished among those who could operate, because of social distancing requirements.

READ MORE:

* Level 3 looking more restrictive than anticipated, Westpac's chief economist says

* Coronavirus: Job ads dive in Australia as deficit heads towards WWII record

* NZ's economy ended 2019 with 0.5% growth, before coronavirus hit

"Overall, we estimate that total GDP is 30 per cent to 40 per cent lower under level four lockdown conditions and 15 per cent to 20 per cent lower under alert level three, adjusting for losses in productivity.

"A key question now is how long we will be in alert level three for."

The Government will review the alert level after two weeks.

CHRISTEL YARDLEY/STUFF ANZ estimated total GDP was 30 per cent to 40 per cent lower under level four lockdown conditions and 15 per cent to 20 per cent lower under alert level three.

ANZ said it was operating on the central assumption that level three would remain in place for a month with some degree of restrictions in place for the rest of the year at least.

"Based on this and our understanding of activity under the various alert levels, we expect GDP to fall 22 per cent to 23 per cent in the first half of the year and to be 8 per cent to 10 per cent lower over 2020."

Despite the Government stimulus – it has put more than $10 billion into the economy through the wage subsidy scheme – the ANZ report said it expected unemployment to reach 11 per cent.

That would mean an extra 240,000 people out of work. "This is expected to be seen alongside a fall in labour-force participation. If that did not occur, the increase in unemployment would be even greater."

It would take time for the labour market to recover, which would put pressure on household incomes and increase consumer caution. Reduced employment prospects would limit gains in house prices.

"House prices are expected to fall significantly, as typically happens in economic downturns. House prices normally swing much more than GDP does. At this stage we expect to see house prices drop 10 per cent to 15 per cent, with demand under considerable pressure. There is downside risk to this, particularly if credit becomes squeezed."

Chief economist Sharon Zollner said Kiwibank chief economist Jarrod Kerr's suggestion of $1500 stimulus payments was interesting but potentially not as targeted assistance as the Government might want.

She said net core Crown debt was expected to lift to 40 per cent or 50 per cent of GDP.

"The hit to the fiscal books will be significantly larger than during the global financial crisis, but to levels that would not incur blushes in an international comparison today."

But that would mean the Government would need to eventually rebuild its fiscal buffers.

"Fiscal consolidation may require a reduction in entitlements, such as winding back fees-free tertiary education or lifting the eligibility age for NZ Super or introducing means-testing. Tax rates may also increase, or new tax types - such as on capital gains, wealth, or inheritance - could also be introduced. But it's important not to go down the path of austerity for austerity's sake. Following the global financial crisis, the pursuit of fiscal consolidation saw spending on key infrastructure dwindle on a per capita basis, leading to the infrastructure deficit that we know all too well today."

Zollner said the Government would already be considering its options in this regard although it would be reluctant to suggest to people that their incomes would drop or taxes increase, in case it drove them to spend less money than they otherwise would.

She said it was a problem "for another day" and because New Zealand had gone into this downturn with Government books in good shape, that day was further away for this country than for some.

But New Zealand faced other risks, such as climate change, earthquakes and the cost of superannuation for an ageing population, which meant the Government needed to carry less debt than some.

She said while there would be significant, and in some cases permanent, damage as a result of Covid-19, the economy would eventually rebuild.

"We expect to see an export-led recovery, supported by enormous fiscal and monetary stimulus. With the labour market and inflation expected to improve only gradually, it will be crucial for central banks to stay the course with monetary stimulus well into the recovery. There is a risk that central banks unwind stimulus too early, undermining the recovery and inflation expectations."

Ratings agency Fitch expects the country's fiscal balance to drop to a 4.8 per cent deficit in the year to June 2020.

It said it also expected a poor outlook for the economy to weigh on the amount of tax the Government could collect.