How the economy caught coronavirus

As Prime Minister Jacinda Ardern raised the alert level on coronavirus yesterday in the face of likely community spread, you could almost feel the economy shudder.

There’s only one way to describe the economic fallout from this virus; it’s carnage.

There was no inkling of this at the Government’s first press conference on coronavirus on January 23, when there had been 400 reported cases and 17 deaths in Wuhan in China.

Health Minister David Clark told Kiwis through the assembled media on a hot day in the Wairarapa to ‘‘be alert, not alarmed’’.

Yet less than two months later, New Zealand has closed its borders to foreigners, and introduced a Covid-19 alert scale running to 4 levels. Level 4 is a near total lockdown of the entire community; only supermarkets, pharmacies and clinics would remain open. The Government could requisition buildings and facilities where needed.

Air New Zealand has been bailed out and the Government has announced a massive stimulus package to subsidise wages of affected industries until the situation brightens.

The nation is on a war footing but without the ordnance.

But as concerning as the health response is – it is the economic fallout of the virus’ global nature and the strict health rules that are now getting scary. Every major bank now thinks there will be a deep recession. No one is prepared to predict how deep it could be.

First, the good news. As Reserve Bank Governor Adrian Orr writes exclusively for the Sunday Star-Times today, the bank has New Zealand’s back. It has stepped in to make sure that commercial banks know they have access to basically as much money as they need to keep lending to people and businesses during this period. The Reserve Bank has slashed interest rates and is also on standby to buy government bonds if required to pump more cash into the economy. This is known as quantitative easing, or in the old jargon, printing money.

The Reserve Bank, which has required banks to hold more capital since the Global Financial Crisis, has now told them that they can start to tap into that capital as needed.

This is a reassuring, proportionate response and should ensure that any irresponsible and untrue rumours about banks running out of money don’t snowball. As Orr writes, ‘‘there is no need to stash cash, we do that for you’’.

The regulatory response to the Global Financial Crisis means the financial system is much better equipped to deal with a downturn this time.

The other good news is that outside of forestry, which was facing its own problems prior to Covid-19, commodity exports such as dairy and meat appear to be flowing well, and prices are holding up.

The Government’s hurried $12.1 billion economic package announced on Tuesday, to provide over $500 per week per employee for businesses to subsidise wages, was fast and put the cash where needed. But its limit was $150,000. Currently the Government is working on plans for medium and larger businesses and knows more is required.

The bad news. Last week the Government was thinking that it might be able to hold off its next big policy splurge until the May 14 Budget. In normal times delivering a totally new Budget in that timeframe would be a stretch. Now the Government probably won’t have the luxury of waiting that long for its next big package.

That’s because the economic effect of the virus response is now becoming clearer: If community transmission occurs, the country will most likely come to a virtual economic standstill.

Tourism is dead – including, as of yesterday, domestic tourism. That’s 10 per cent of the economy if auxiliary services are counted. Ditto aviation.

If community transmission occurs, the country will most likely come to a virtual economic standstill.