Measuring, let alone solving, crisis is complex
EVERYONE is hoping for a strong economic recovery. But what does that look like? Noone has lived through a pandemic recession of this kind before, with selfimposed lockdowns and border restrictions.
Economists model a range of scenarios, from best to worstcase. But let’s face it, after Covid19, none of those scenarios look great.
As ANZ chief economist Sharon Zollner puts it: ‘‘The best recovery would involve a 100% effective vaccine available tomorrow . . . but wishful thinking won’t get us very far.’’
The good news, Ms Zollner says, is that New Zealand is currently in the bestcase scenario, having eliminated community transmission of Covid19 and with most Kiwis now being 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,’’ Ms 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 sector debt binge that stores up problems for down the track’’.
That all sounds great. But the nature of this crisis means even measuring success is not going to be easy.
The New Zealand Institute of Economic Research produces a quarterly set of consensus forecasts, pulling together the work of all the major market economists in New Zealand as well as Treasury and the Reserve Bank.
The graphs provide a range of best, worst and central case scenarios.
While forecasts keep shifting, the June consensus survey provides a good snapshot of expectations, against which we can benchmark success.
Recession — technically, two consecutive quarters of economic contraction — is inevitable. But how deep and long will it be?
Consensus data shows that for the year to March 2021, economists see GDP contracting by as much as 11.8%, or by as little as 6.6%.
But does GDP tell us anything meaningful in a crisis where the biggest economic constraints are selfimposed?
‘‘Forget about looking at growth rates because there’s going to be an awful lot of noise and they’re going to be all over the place,’’ says Cameron Bagrie of Bagrie Economics.
GDP is a backwardlooking measure at the best of times. And these aren’t the best of times.
The enormous lockdown slump in the first half of the year will likely come with a smaller but still steep rebound in the second half — the muchvaunted Vshaped recovery. Or is that just halfway to a W? We are now in the second half of the year, so in technical terms we might already be out of recession, but obviously a real recovery is still a long way off.
‘‘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,’’ Mr Bagrie says.
He recalls how after the Global Financial Crisis it took until the end of 2010 to get the economy back to the same size it was in 2007.
But this crisis is different, he says.
The restrictions required to control Covid19 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.’’
Mr Bagrie is not 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, economist Tony Alexander says.
‘‘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,’’ Mr 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 is 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 are not going to be as bad as they think.
Before Covid19, the unemployment rate was about 4%. So where is it expected to land?
At the start of June the NZIER consensus survey showed a range of forecasts between 7.1% and 9.6%.
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%, and not until March 2022.
‘‘That upbeat outlook attracted a lot of attention,’’ NZIER principal economist Christina Leung says.
But she warns that the official rate, as measured by the Stats NZ 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.
‘‘Unemployment is key to banks being sound and robust, given that most of their lending is to households for houses,’’ Mr 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 cannot just look to the traditional unemployment rate.
‘‘It’s not one unemployment number; there’s going to be labour force participation, hours worked, wages . . . it’s going to be that whole gamut around household income.’’
Worryingly, Ms Leung notes that the activity graphs for the consensus forecasts tend to be Vshaped, except for the labour market, where the graph suggests a more persistent downturn.
‘‘Jobs goes right to the heart of things,’’ Mr 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% for longer than everyone is assuming.’’
Right now we are experiencing the upswing of the Vshaped 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 Wshaped recovery.’’
That means we may face a doubledip 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 5%, the worst forecast since the Great Depression.
It was a timely reminder that no matter how well things are going locally, we cannot ignore the rest of the world.
New Zealand has yet to be hit by the full effects of the global downturn, Mr 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, Ms Leung says.
In terms of defining a successful recovery, it is more interesting to look at the factors we do control, she 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.
Ms Leung believes it has been a solid start, but she wants to see spending shift to longerterm horizons and says infrastructure spending needs to be of high quality.
The Reserve Bank has also been proactive, slashing interest rates and launching a quantitative easing programme to keep rates low.
‘‘We’ve got firepower which we’re deploying through fiscal policy and monetary policy,’’ Mr Bagrie says.
‘‘But it’s not just about throwing money around like confetti . . . because the taxpayer realises that they’re on the hook for that, so they save,’’ he says.
He would like to see more microeconomic policy tweaks.
‘‘We’ve got to be looking at the supply side foundations of the economy. It’s not just about deploying your balance sheet; it’s about turning the dial on other things as well.’’
❛ The key thing in regard to creating sustainable jobs and putting money in people’s pockets is how fast the economy can grow over the next 5 to 10 years
Economist Cameron Bagrie