New Zealand’s economy is officially in a recession, with statistics released today revealing a record 12.2% decline in GDP. But as Jarrod Kerr of Kiwi Economics writes, it’s now time to focus on recovery.
As economists, we love trawling through data. But we’ve never seen anything like this. This is traumatic. Service exports were stonewalled, down 40% in the quarter. Consumption was down 12% and investment was slashed by 20%. Essential services obviously held up far better during the lockdowns and recorded more modest declines. We were a little surprised by the weakness in imports, with fuel down more than we expected, hence the slight upside from our estimate of 12.5% and the actual 12.2% for the quarter. Never have we recorded such declines. And never have we bounced back so quickly, either.
There is little point getting hung up on the second-quarter numbers. There’s likely to be major revisions to the numbers by StatsNZ as new information comes to hand. Also, the biggest decline in activity on record will probably be followed up by the largest quarterly jump. We’re almost in the December quarter. The rebound in activity in Q3 is likely to have been softened by Auckland’s level three lockdown, but we’re still picking a 10% quarter-on-quarter jump because the economy was more operational during the August lockdown.
Level three allowed for more economic activity to take place than under a complete lockdown. Businesses and households have clearly adapted to trading in a world with limited face-to-face interaction. Many re-jigged their business models to accommodate the renewed restrictions on gatherings and the shift to digital. And activity that was halted during the lockdown, particularly across traditional services, wasn’t necessarily cancelled but deferred. Kiwibank electronic transactional data shows that spending in these areas has resumed since moving down the alert levels. It’s developments like these that support a strong third-quarter rebound in economic activity.
Time to pivot to the future
The unprecedented nature of the economic shock means we face a unique recovery full of opportunities. A key opportunity dished up by Covid-19 is a weapon in the fight against climate change. Many New Zealanders were forced to work from home, and many preferred it. The lockdowns provided proof that a decent chunk of the workforce can successfully work remotely, thereby reducing the need for the daily commute. A shallower peak in transport takes some pressure off clogged transport infrastructure and reduces carbon pollution. The need to re-engineer parts of our economy is also throwing up opportunities to tackle climate-related issues. The government has the ability to fast track progress in environmental areas, with access to ample funding at very low, even negative interest rates. We have a “once in a generation” chance to right the wrongs of the past.
A shift to working from home will change the nature of many workplaces. If a large share of the workforce continues to work from home, office space in our largest centres will be freed up, helping to boost productivity. Businesses may find more resources to invest in the next opportunity. On the flip side, however, the commercial property sector will likely face the challenge of reduced demand. Many businesses dependent on CBD workers for their coffee fix, and other retail habits, may struggle as well.
Some industries may grab onto opportunities made available by disruptions to global supply chains. The inevitable reallocation of resources towards more productive firms and processes will have benefits. The faster adoption of productivity-enhancing technologies such as AI and automation seem obvious.
Policy measures should now focus on enabling businesses to adapt. The wage subsidies were the best policy response during “triage”. We’re now in a rehabilitation phase. Policies aimed at small and medium-sized enterprises (SMEs) will be important. SME grants may be a cost-effective way to support affected businesses and encourage new ones to emerge. SME grants would enable affected businesses to pivot online or evolve for a new client base. Ultimately, we need to redirect disrupted employees into new employment opportunities. Lost retailing jobs could be redirected into new and exciting roles in protecting the environment, education or revamping health. SME grants could be targeted at lowering the cost of hiring additional workers.
More needs to be done. The reason interest rates are falling, and will likely go negative (for wholesale rates), is because the RBNZ believes there isn’t enough stimulus in the economy to return us to full employment. If we’d done too much, interest rates would be rising. The fact we haven’t done enough means interest rates will keep falling. It’s that simple.
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