Brian Fallow:
Making consumers buy again
The challenge of getting the economy up and running again can be thought of as a four-legged stool. Those four legs are: consumers need to have money to spend; they need to be able to spend it; they need to be willing to spend it; and the goods and services they want to buy need to be available.
Crucial to all of them, to state the obvious, is success in combating the epidemic.
At the moment we seem to be on track for something like the best-case scenario, number 1a among those the Treasury outlined last week.
It assumes we spend two months altogether at alert levels 4 and 3, the latter being still severely restrictive but a kind of recovery ward where we wait and see whether the patient really is out of danger.
This scenario also assumes that another $20 billion of fiscal support will be forthcoming on top of the $20b or so already announced. It would be astonishing if next month’s Budget did not deliver on that.
The biggest ticket item so far has been the wage subsidy, which has provided a not very generous subsidy to around 1.6 million people, or just over 60 per cent of all employees, for 12 weeks at a cost so far of $10b.
Not even the Government can afford to burn cash at that rate indefinitely, so getting people back to work, safely, as opposed to just keeping them on the payroll, is crucial to the first leg of our four-legged stool — disposable incomes.
For what it is worth, the Treasury’s bestcase scenario has the unemployment rate peaking at 8.3 per cent in the current quarter (up from 4 per cent at the start of the year) but the curve bending down to 5.6 per cent a year from now.
Another key cost for cash-strapped businesses is rent. Under a law change announced last month, commercial property owners will be able to claim depreciation on their buildings.
The Government also intends to introduce legislation this month to allow a loss carry-back scheme.
“Businesses expecting to make a loss in either the 2019/20 year or the 2020/21 year would be able to estimate the loss and use it to offset profits in the past year. In other words, they could carry the loss back one year,” the IRD says.
“This change means we could refund some or all the tax already paid for the year they were in profit. It means firms could cash out all or some of their losses in 2019/20 or 2020/21.”
Like other businesses, including their tenants, commercial property owners should be able to apply for bridging finance from banks under the scheme where the taxpayer underwrites 80 per cent of the risk.
And they might want to consider that the commercial property market looking forward will be one of excess supply, an incentive, surely, to give existing tenants a break.
None of which will be much use until customers are able to return, which puts the onus on the population at large — or rather at home — to comply with the rules for alert level 3, in order to shorten its duration and above all, prevent a yo-yo back to full lockdown.
Confidence that the epidemic is under control is also crucial to the third leg of our stool — consumer sentiment. People are not going to flock back to shops, bars and restaurants if they think they are risking their health, or even their lives, in doing so.
Even as confidence grows on that score, people’s concerns about the security of their jobs are liable to shift the split between spending and saving in a more provident direction than we have been used to. The aftermath of the last recession saw New
Zealand households depart for a while from their usual custom of consuming more than their disposable income.
One of the factors underpinning the more recent, and for us normal, string of negative household saving rates was the wealth effect from house price inflation. This will go into reverse now if house prices fall, as expected.
A key factor underpinning the rapid rise in house prices and household debt levels in recent years has been a high employment rate. At the end of last year, 77 per cent of New Zealanders aged 15 to 64 were employed, compared with 72 per cent in the United States, which was enjoying, we were told, the best labour market for 50 years.
That prime age employment rate will be tumbling now, which is also a potential issue for banks. Reserve Bank governor Adrian Orr told the epidemic response select committee last week that the single variable that most challenges the profitability of banks is unemployment.
“It’s not interest rates. It’s not house prices; you can choose just not to sell. But if you do not have a job and that looks like persisting — and I’m talking about doubledigit unemployment — that is when banks are seriously challenged,” he said.
There is also likely to be a negative wealth effect from the hit to financial assets. Lately, checking KiwiSaver balances, share prices and deposit interest rates is a depressing activity best avoided.
Finally, even when consumers have money to spend, and are allowed and willing to spend it, the goods or services they want need to be there. Disruptions to supply chains are likely to affect a range of consumer goods for an extended period.
And as for services, at least those which require people to use their hands for more than tapping a keyboard, the ability to do that safely will continue to be a paramount consideration.
If you do not have a job and that looks like persisting — and I’m talking about doubledigit unemployment — that is when banks are seriously challenged.
Reserve Bank governor Adrian Orr