With the handbrake on

Novel responses, and returning to normality

One of the world’s most popular lockdown reads has been Gabriel Garcia Marquez’ Love in the Time of Cholera. When Covid first hit New Zealand, and it became clear how contagious it was, the Government had to make difficult, fast decisions. We endured a tough lockdown (one of the tightest in the OECD by mobility measures). It was relatively brief, but it caused the worst quarterly economic contraction on record.

By the end of it, our GDP was 12 per cent lower than precrisis. Forecasts at that stage were grim – the International Monetary Fund saw the world contracting for the year ahead and New Zealand forecasts were extremely negative.

Like other OECD countries, our Government poured in stimulus: the Budget set aside $50 billion for Covid-related spending. A job support scheme was implemented. A shovelready construction initiative and an infrastructure programme boosted confidence initially, although progress since then has been disappointingly slow.

With borders closed and other controls in place we followed the East Asian model of authoritarian Covid control. International travel and tourism were closed down and tertiary education severely hurt. But following initial logistics disruption, the resurgent Chinese economy kept commodity prices buoyant, and we experienced a surprisingly strong domestic revival, especially in personal and housing expenditure.

The lockdown convinced New Zealanders that they should spend some of their savings from travel on house renovation, home office equipment, new kitchens, and garden landscaping, as well as personal services such as elective health and on-line entertainment. This coincided with what was already a strong period of house construction, sales and price growth, resulting in a very tight construction sector.

This spending brought a remarkable bounce-back in the third quarter. We still await official data, but this means New Zealand may join the select group of countries to actually achieve average growth over 2020.

But 2021 will be challenging. Closed borders and slow vaccine distribution means the international tourist industry will remain dormant. International businesscustomer relationships have continued with Zoom, but are gradually atrophying due to lack of face-to-face contact. Auckland is hosting a vastly reduced America’s Cup, and we are running a huge series of virtual Apec meetings, which would normally bring in thousands of visitors.

The medium term is full of uncertainties. In New Zealand and overseas, people have changed behaviours, and we do not know how much of that will stick or recur with future pandemic threats. Virtual meeting technologies and work from home has altered the location of some work. So far this has meant more home offices, and lower requirements for city office space.

With the digital challenge, the retail industry was already changing, but this has sped up. Online purchasing means supply chain realignment, more warehousing and more couriers. It means less high street shop space, and we can already see this happening. This reduced demand for street level shops, for high-rise office space and for carparks means commercial property oversupply and contraction, though this may take some time with multi-year leases in place.

Will New Zealand emerge internationally competitive after Covid? The country has enjoyed a reputational boost as a safe, well-governed scenic destination, that could eventually boost tourism and migration. However, the border lockdown is giving us the opportunity to rethink how we want this.

Around the world, governments have spent far more stimulating their economies than ever before. This will mean a huge increase in public debt, big demands on sovereign funding markets, likely financial failures for some emerging economies, and a long period of stabilisation. In New Zealand the government stimulus is estimated to drive up public debt just over 50 per cent of GDP. Thanks to good fiscal control in the past, that looks very manageable.

This build-up of debt for future generations is only one indication that Covid has been a very disruptive event, hurting different people in different ways. Younger New Zealanders have faced educational disruption and tougher job prospects; Ma¯ ori, Pacific peoples and some migrant groups have suffered disruption to more vulnerable jobs; women have been more exposed to the services recession; older people have lost mobility.

What has worked well for us? We could be grateful for our broadband upgrades, our taxfunded public health system, our tight border control, our quick and dirty jobs stimulus, and the room we had to take on more debt.

While we wait for vaccines, digital passports, bubbles and bridges, there is another Gabriel Garcia Marquez classic that speaks to our condition:

Online purchasing means less high street shop space, and we can already see this happening.