How much is really ‘ up and running’

Minister’s 75% figure ‘best-case’ rather than reality, say analysts

Since Tuesday’s lifting of Covid-19 alert level from 4 to 3, some of New Zealand’s largest industries have been allowed back to work. Cafes and takeaways have begun operating (in a limited way), construction sites have restarted and logs have begun arriving at ports around the country, for the first time in more than a month.

Exactly how much is happening in the economy may become clearer over time, but a combination of the many thousands of businesses which are still unable to operate and restrictions on those which can, means it will be far below capacity.

As he mulled options for providing commercial rent relief, Justice Minister Andrew Little declared on Wednesday that “75 per cent of the economy is up and running again”.

While hundreds of thousands of people could — in theory — return to work last week for the first time since March, the statement is likely to represent something of a best case scenario, unlikely to be met in reality.

At the very least it is Little’s interpretation of a different assumption, which even its creators have little confidence in.

Little’s office confirmed the claim was drawn from Treasury documents released earlier in April which estimated how much of a hit the economy would take under a range of scenarios, defined by different periods at different alert levels.

Under alert level 4, Treasury assumed New Zealand’s economic output would be 40 per cent below “normal”, while at level three it would be 25 per cent down (Little then took the reverse to be true, that 75 per cent was up and running).

Opposition leader Simon Bridges yesterday poured cold water on the figure. “The Government says 75 per cent of the economy is operating again but we doubt that,” he said.

“Tourism, hospitality and retail have been shut down for six weeks. The longer this goes on, the more jobs will be lost”.

To build its scenarios, Treasury conducted high-level analysis of how much work could be done at home and how much activity was permitted under different alert levels.

Even by the standards of forecasting this is a difficult task; Treasury was making estimates before the Government had finalised what was permitted at alert level 3.

Treasury acknowledged this. “Clearly, the margin of error surrounding these estimates is large.”

While estimates vary widely, economists seemed to see 75 per cent capacity at more of an upper limit to activity under the current conditions, rather than the actual level.

“It’s an optimal scenario, it’s a theoretical scenario, but we’re probably not quite there yet,” Stephen Toplis, head of research at BNZ, said.

“Even if all 75 per cent of those people were working, it’s highly likely that productivity will have taken a dent because of the difficulties imposed on the operations through things like social distancing . . . and the like,” Toplis said.

While it was possible the economy may be operating at 75 per cent capacity, Toplis said it could be down by a third compared with before Covid19 restrictions were introduced.

Infometrics estimates that under alert level 3, 74 per cent of workers could be on the job and gross domestic product could be “up to 82 per cent” of what it was before Covid-19.

But Infometrics senior economist Brad Olsen said this represented something like a “speed limit” above which the economy could not travel under the current restrictions, and the actual employment and output was likely to be lower.

Some workplaces would not yet be operational, some building sites would have stopped altogether and while some cafes were open, they would be doing significantly less trade than usual.

“The capacity to get stuff moving is there, but the ability is much more constrained,” Olsen said.

Economies adapt to different