With a mandatory four-week shutdown about to come into force to prevent the spread Covid-19, New Zealand’s economy faces one of the most uncertain periods in its history. We ask two leading economists to help us find meaning in the madness.
There may come a time in the next few days or weeks when you are struck by a feeling of powerlessness. On Wednesday at midnight, New Zealand will be put into a mandatory four-week shutdown to prevent the uninhibited spread of the Covid-19 virus. For many of us – as the ideas and routines on which we’ve built our lives are upended – it will feel like control has moved beyond our grasp.
The Spinoff reached out to two of New Zealand’s leading economists to help us explain what was happening. Just what impact would this unprecedented lock down have on our economy exactly, and how long would it last?
Both of them, Sense Partners economist Shamubeel Eaqub and Kiwibank chief economist Jarrod Kerr, were brutally honest. They said they didn’t know. No one did. We were in uncharted territory, dark waters, and the destination was impossible to foresee.
What they did know was that the shutdown, as painful as it might be, was essential to protect New Zealand’s economy – and its people – from devastation.
“Lets think about it this way,” said Eaqub, “if we don’t do anything and there is a pandemic that sweeps through the country, the economic cost and the cost of human lives would be extraordinary. At the top end, the loss of human life would be worth about half our economy. That’s our worst-case scenario.
“Hopefully the outcome we get is a period that’s fairly short, where we freeze the economy and nothing happens. But then we have protected as many businesses and jobs as possible and we come out of that with a recovery that is sustainable and at a better level.”
Jarrod Kerr had a similar view. While he couldn’t predict how long economic recovery would take, he said it would extend far beyond the four-week shutdown period.
“I think the threat of the virus will be lingering for much longer than four weeks, so we think of this in terms of months rather than weeks. The important point here is, how do we hold things together over that period?
Preventing the worst case scenario
With so much uncertainly and so many variables unknown, there’s some comfort in the fact that both economists have confidence that the government is doing everything in its power to cushion the fall, and prevent the worse-case economic scenario from unfolding.
Earlier this week, the Reserve Bank announced it would purchase $30bn worth of government bonds over the next year, a monetary policy tool known as a Large Scale Asset Purchase programme.
According to Kerr, the purchase is an “absolutely massive” move and testimony to the government’s incredibly powerful balance sheet.
To the layperson, the purchase can be difficult to understand. Kerr explains it like this: The Reserve Bank (our central bank) has the ability to create money, which it sends to the New Zealand treasury in exchange for government bonds. The exchange essentially pumps billions of dollars of money into the New Zealand economy, which banks can use to extend financing and credit to businesses, preventing their collapse and job losses.
“It has injected liquidity into the bond market which didn’t exist last week and it’s smashed interest rates across the curve. So it was a very bold statement that did its job. Now it also sends a strong signal to the government: if you want to increase debt by $10bn, $20bn, $30bn, your central bank’s sitting there ready,” Kerr said.
In a world governed by either fear or confidence, such a move gives the government and the economy room to breath and borrow, instilling faith in the fluidity of credit.
A question of confidence
After the Reserve Bank made the announcement on Monday morning, the government followed with an arsenal of additional financial measures to bolster that confidence and ensure that people and businesses know that they’ll be looked after.
Finance minister Grant Robertson announced that the Covid-19 wage subsidy scheme would be expanded to include basically all employers and workers and that the $150,000 cap any one employer could receive had been removed. The estimated cost of the scheme rose from $5.1 billion to $9.3 billion.
“This means that at least some level of income is guaranteed to every business and every job over the course of the shutdown,” said Eaqub. “And that’s really important because we’re all living through a great deal of anxiety right now. This creates that safety net so that while we’re hunkered down at home…we’re not worried about whether or not we will lose everything we have.”
“Will it mean that there will be no job losses or no business failures? Of course not, there will be. We’re looking at the biggest economic shock since the great depression. But we’re doing everything in our power to protect the most important thing which is people.”
This morning, the New Zealand Herald reported that the government was moving to reinforce that confidence even further, with Grant Robertson agreeing in principle to a “business finance guarantee” with New Zealand’s major lenders.
“The scheme would leverage the Crown’s balance sheet, to enable the banks to extend lending to firms which wouldn’t otherwise be viable,” Robertson said.
While further details and the size of the measures have not yet been announced, the Herald reported that it will most likely be an extraordinary taxpayer-funded bailout, resembling to an extent that which was applied by the US government during the GFC.
“Whereas in the Global Financial Crisis there were bailouts for major banks and financial institutions, this is potentially a bailout for just about any business,” the report said.
According to Eaqub, while these moves won’t guarantee complete economic protection, they are designed to shelter the most fragile and exposed industries and businesses from the worst of the fallout.
Growth from the shutdown
While some businesses will be crippled beyond recovery over the next weeks, Eaqub said that operations providing essential goods and services like utilities, supermarkets and logistics are poised to do well throughout the shutdown.
He said the growth of these businesses, along with a potential reduction in social inequality could be some of the benefits that New Zealand could see come from this upheaval. However, once the economy moved into recovery, the changes would need to be managed carefully to prevent a few taking advantage of the situation.
“When we had the great depression or the big recessions of the past, by and large inequality tended to reduce. We haven’t seen that with the last few recessions where inequality tended to stay high and the rich got richer despite the downturns.”
While moves to profit off the situation won’t be seen for months, there will be some who are going to be well placed to take advantage of the change, by essentially picking up distressed assets for very little money. Eaqub said this needed to be regulated.
“As the recovery begins, that’s when the vultures and the bottom feeders will be everywhere.”
Parallels with other historical economic crises have been a constant feature of this saga. While exact comparisons are impossible to make, the expert consensus is that the impact of Covid-19 will exceed that seen in the aftermath of the global financial crisis.
New Zealand’s position
While neither Eaqub nor Jarrod Kerr could say whether New Zealand was better placed than other countries to get through the hard times ahead, they both believed that our geographical isolation and our domestic food production would help us weather the storm.
“The fact that we produce our own food, the fact that we can pretty much survive just off our own resources is a big thing in this sort of event. We export food. I think we’re relatively better off just on that alone,” said Kerr.
While our reliance on trade and export would certainly have an impact on our daily lives, Eaqub said New Zealanders should have confidence in the robust institutions that made our economy resilient.
“We’ve got the fundamentals of the economy that work really well. We’ve got strong institutions, and we’ve got trust in each and our institutions and government.”
“We might differ in terms of our ideological views but at its core there is this very strong trust which is very important for how an economy functions, and there I think New Zealand stands apart from most of the countries around the world.”