Based on the latest Kiwi Economics data, Kiwibank senior economist Jeremy Couchman explores what fresh economic shoots could be growing in the fertile ground left by Covid-19.
New Zealand has done extremely well to crush the Covid-19 curve and allow the rapid reopening of the economy. At Kiwibank we have been pleasantly surprised at the surge in spending on electronic cards by the bank’s customers as we left lockdown behind. Yes, some of the rebound in spending is simply the release of pent-up demand, but New Zealand looks to have avoided the very worst economic consequences, such as an unemployment rate of over 20%.
However, let’s not forget that the New Zealand economy is still far from out of the woods. Our borders remain closed for the foreseeable future – bar the possibility of a trans-Tasman bubble – which will hobble industries reliant on foreign arrivals such as hospitality, retail and education. But with any crisis there comes opportunities for our economy. Below we outline the three biggest boons to the New Zealand economy from Covid-19, based on the latest Kiwi Economics data.
The fight against climate change
An inadvertent effect of Covid-19 may aid New Zealand in its fight against climate change. Alert levels three and four provided proof that a decent chunk of our workforce could work successfully from home, thereby reducing the need for the daily commute. A shallower peak in transport takes some pressure of clogged transport infrastructure and reduces carbon pollution. Such a potential contribution to the fight against climate change should not be scoffed at.
For instance, since 1990 road transport has generated nearly a fifth of New Zealand’s greenhouse gas emissions, according to Ministry for the Environment. So even a broad commitment toward working only one or two days from home could make a meaningful dent in the country’s carbon emissions. Collectively we should not squander this opportunity. Workplaces, where possible, should move permanently to more flexible working arrangements.
Regional dispersion
The rise of flexible and remote working could also help distribute our workforce throughout the regions and increase the effective catchment areas of our largest cities. If commuting to work is no longer a daily ritual, is there a need to live as close to centres of employment? The ability to work from home could alleviate some of the housing shortage in the heart of a sprawling city such as Auckland. And we may see more households moving to the regions. But we must remember there are unintended consequences from a shift away from our CBDs: many small businesses rely on the flow of city workers to provide their livelihoods, from dry cleaners to cafes.
Fertile ground for innovation
Another opportunity for the New Zealand economy is the accelerated adoption of new productivity-enhancing technologies as we recover. Technologies such as artificial intelligence (AI), automation, and data-driven technologies were increasingly being adopted globally over the last decade. The Covid-19 crisis, like any major economic downturn, will see the destruction of firms and jobs. But from this destruction comes creation as resources are channelled toward the most productive firms and new jobs are formed. An economic recession can fire-up the entrepreneurial spirit in those that have lost work, thereby sowing the seeds for a new generation of successful start-ups.
A silver lining in the current storm would be increased adoption and investment in more of these technologies by New Zealand firms, aided by the current cheap cost of money. Interest rates have been slashed to record lows in order to support new investment activity. The Reserve Bank of New Zealand has done whatever was necessary to support the economy through the current economic crisis. Whatever it takes also means interest rates are likely to remain near record lows for a long time.
Furthermore, anti-globalisation and supply chain disruption will lead to a growth of domestic production. The GFC was widely accepted as being an accelerant of globalisation resentment. The Covid-19 crisis is having a similar effect on global trade and will likely be felt for for years to come. This is partly justified, as the crisis has exposed vulnerability of overly concentrated global supply chains. But also, the uglier Trumpian variety of protectionism is growing.
We have seen US and China tensions intensify because of Covid-19, and they won’t likely fade anytime soon. President Trump will likely stoke these tensions to fire up his support base as he fights for re-election. New Zealand’s open economy means we have a diversified import base. But despite not having all our eggs in one basket, we still weren’t protected from major global supply-chain disruption in the early stages of the Covid-19 crisis. At Kiwibank we heard many anecdotes from importers struggling to source product while large swathes of China were under lockdown.
There is a hidden degree of concentration in modern supply chains. For example, we may import electronics or cars from Europe but small but vital components within these goods may only be produced in a few countries outside the region. Most advanced computer chips for instance are manufactured in four countries: the US, South Korea, China and Taiwan. An opportunity presents itself for some niche producers in New Zealand to begin domestic production, such as the manufacture of PPE.