LOOKING FOR SIGNS OF HOPE

How will we know when the Covid-19 recovery comes? Liam Dann details the signals that will show the economy is on the mend

Everyone is hoping for a strong economic recovery. But what does that look like? No one has lived through a pandemic recession of this kind before, with self-imposed lockdowns and border restrictions.

Economists model a range of scenarios, from best- to worst-case. But let’s face it, after Covid-19, none of those scenarios looks great.

As ANZ chief economist Sharon Zollner puts it: “The best recovery would involve a 100 per cent effective vaccine available tomorrow . . . but wishful thinking won’t get us very far.” The good news, says Zollner, is that New Zealand is currently in the best-case scenario, having eliminated community transmission of Covid-19 and with most Kiwis now able to get on with their lives.

“The problem is, the one remaining economic restriction is a doozy,” she says.

“With a closed border, New Zealand is a smaller economy, and with no timeline to open up again, it is impossible for fiscal policy to bridge the gap back to normality.

“In that context a ‘good recovery’ is one where new opportunities arise and the unemployment rate falls more quickly than we expect,” Zollner says.

In her view, a good recovery would involve New Zealand finding “ways to leverage its new international kudos without compromising border security“.

In that positive scenario, commodity prices and exports would also hold up really well, she says.

Ideally, it would also be a recovery “in which we avoid a blowout in wealth and income inequality and avoid a private

“The benchmark I’ll be looking at is how long it takes to get the New Zealand economy back to the same size it was precovid,” Bagrie says.

He recalls how after the global financial crisis it took until the end of 2010 to get the economy back to the size it was in 2007.

But this crisis is different, he says. The restrictions required to control Covid-19 mean the damage is unevenly distributed and the recovery will be too. “For a lot of sectors, like tourism, it’s going to take even longer to get back to level . . . then for others they’ll have hardly skipped a beat.”

Bagrie isn’t alone in his view that this crisis has made GDP growth figures redundant.

Because the economic contraction reflects lockdowns rather than true economic factors, “shockingly bad and shockingly good economic numbers” should be equally ignored for many months, says economist Tony Alexander.

“Unemployment is certainly the indicator that matters in people’s lives and it’s probably a better indicator of what we’re going through this year than GDP,” Alexander says.

“For me, a measure of a good recovery will be the bulk of businesses that are planning to lay off workers in the next two or three months, not laying them off.”

It’s reasonable to expect the economy to keep growing over 2021 due to stimulus — low interest rates, money printing and government spending — he says. “But it comes down to the actions of businesses later this year when the wage subsidy ends and they face the decision, do I have enough confidence to hold on to these people?”

His advice to the Government is to do everything it can to convince business that things aren’t going to be as bad as they think.

Before Covid-19, the unemployment rate was around 4 per cent. So where is it expected to land?

At the start of June the NZIER consensus survey showed a range of forecasts between 7.1 per cent and 9.6 per cent.

Some forecasts have been lifted over the past month.

But the NZIER team was among early optimists with a call in May that unemployment will peak at just 8.1 per cent, and not until March 2022.

“That upbeat outlook attracted a lot of attention,” says NZIER principal economist Christina Leung.

But she warns that the official rate, as measured by the Statsnz Labour Force survey, may not tell the full story.

The official unemployment figure is derived by asking people if they are actively looking for work, and is a separate measurement from the numbers going on the Jobseeker benefit.

“In terms of job losses, a large part of that difference is that we do expect a discouraged worker effect,” she says.

“The reality is that if there are no jobs around, then people stop looking.”

Reserve Bank governor Adrian Orr says keeping unemployment low will be one of his primary measures of New Zealand’s recovery success.

“That also impacts strongly on financial stability,” he says.

In other words, if people lose their jobs then mortgage and other debt repayments become a big problem and that can have a domino effect through an economy.

Orr says. “It doesn’t matter how low the interest rate is, if you’ve got no income, it’s not going to help.” He also points out that we can’t just look to the traditional unemployment rate.

Worryingly, Leung notes that the activity graphs for the consensus forecasts tend to be V-shaped, except for the labour market, where the graph suggests a more persistent downturn.

“Jobs goes right to the heart of things,” Bagrie says. “I don’t think unemployment is going to be double digits. I think the real issue is that unemployment is going to remain above 6 per cent for longer than everyone is assuming.”

Right now we are experiencing the upswing of the V-shaped recovery, he says. “But reality is yet to settle in as to what things look and feel like on the other side.

“Beyond that bounce, we are going to be on a slower growth trajectory for a number of years,” he says. “I worry about a W-shaped recovery.”

That means we may face a double dip recession as issues like the border closures and slowing global growth start to bite harder next year.

So far there are few signs of the pandemic letting up.

Last week the International Monetary Fund downgraded its outlook for 2020 global growth to minus 5 per cent, the worst forecast since the Great Depression.

It was a timely reminder that no matter how well things are going locally, we can’t ignore the rest of the world.

New Zealand has yet to be hit by the full effects of the global downturn, Bagrie says.

“If you look at the rural sector — commodity prices — they’ve had cashflow this year. That’s been a big crutch of support for the regions. They’ve been pretty buoyant. I suspect that crutch will go in 2021.”

There are a lot of recovery issues that are outside New Zealand’s control, not least the duration of the pandemic, Leung says.

“So the number of new cases will determine when we can start to open our borders,” she says.

“We talk about the Anzac bubble but as long as there are still cases across the Tasman it becomes a very difficult thing.”

In defining a successful recovery, it is more interesting to look at the factors we do control, Leung says.

Of those, the ability of businesses and individuals to adapt will be a key factor.

“Of course this is easier said than done,” she says. “You can’t just tell a company that’s had huge revenue loss to pivot to a growth industry.” But we can use the resources we have to create conditions that better enable firms to do that, she says.

The good news is that low debt levels have allowed the Government to provide emergency support and to invest in things like new training schemes and infrastructure projects.

Leung believes it has been a solid start, but she wants to see spending shift to longer term horizons and says infrastructure spending needs to be of high quality.