As 2020 draws to a close, Michael Andrew asks the economists what they made of a year of dire forecasts, record spikes, lockdowns, recessions and resilience.
It’s April 2020, New Zealand is in the middle of the nationwide level four lockdown, and I’m on the phone with my old university lecturer, Professor Paul Hansen – head of economics at the University of Otago.
I wanted to talk to Hansen because when I took his classes in 2008 – around the time of the GFC – he had a wonderful way of simplifying complex topics; breaking them down for students, and bringing a sense of order to the chaos.
But mostly, I was eager to speak with Hansen in April this year to see if he was as concerned as I was.
It seemed as though the world was falling apart. New Zealand’s economy had ground to a halt; its borders were closed in an attempt to stop the spread of a global pandemic. Our tourism industry was teetering on the edge of collapse and was bracing itself for mass redundancies, hospitality and retail were in a similar position, and the New Zealand media was seeing entire companies cut their staff and close their doors.
When I asked Hansen what he made of it all, he didn’t hold back – he’d never seen anything like it. From an economic perspective, it felt like the Great Depression of our time.
“It’s blowing my mind,” Hansen said. “In classes we always talked about the, not a, but the Great Depression of the 1930s, and all these apocryphal tales of businesses failing, of people jumping off buildings in the US, of the hardship and soup kitchens in New Zealand.
“And here we are today, in 2020, and it feels very much like we’ve got our own front-row view of our own Great Depression that’s probably going to unfold.”
Hansen wasn’t the only economist referencing the Great Depression earlier this year. In fact it was a common comparison. Such was, and is, the gravity of Covid-19 – the size of China’s economic contraction, the cost of grounding planes and closing businesses across the world, and the immediate impact on financial markets – that there was no other event in human history that seemed to properly reflect the global economic trauma.
In New Zealand, the outlook was just as grim, with the New Zealand Treasury forecasting unemployment to rise to over 13%, government debt to rise from 19% to over 55% of GDP, and New Zealand to enter a severe recession that would take years to recover, therefore compromising all the social and environmental goals that we’d been working toward for years.
As 2020 draws to a close, we now know that New Zealand didn’t experience anything near the economic chaos that was predicted. There were impacts and casualties, of course: waves of redundancies and financial hardship, business closures and a huge increase in government debt. But ultimately, with our economy officially out of recession and New Zealanders about to enjoy a shopping-heavy Christmas and a summer of unparalleled freedom, our country has emerged from the crisis in relatively good shape.
So what exactly happened this year to avoid – or at least delay – the apocalypse that was foretold? Was it a fluke, or did all the government’s tools and measures go to plan?
In other words, what were the key factors and moments of 2020 – the year of the great economic experiment?
Mary Jo Vergara is an economist at Kiwibank. Like Hansen, she looked upon the crisis at the start of the year as a 21st century Great Depression, only to be amazed at how it all worked out. For someone only a few years out of university, 2020 was a true baptism of fire, but also the greatest lecture an economist could ask for.
“This was really the beginning of my career. It’s probably the best way to learn about the interaction between economics and financial markets especially.”
“The best way to understand how economics works is to see it all sort of unravel. And then you’re trying to put it all back together and you find at the end, some pieces don’t look the same as the others, some pieces have been taken out. When you put all that together it just looks like a completely different economy.”
Although there were so many pieces at play this year, she says the biggest and most crucial element was the resilience shown by businesses and households to the initial lockdown.
“We didn’t realise how strong the bounce back would be once leaving the lockdown. We knew there would be a bounce back, but the magnitude was really uncertain.”
Zoe Wallis, chief economist at Deloitte NZ, agrees, saying the speed and almost zealousness with which New Zealanders began spending after the level four lockdown cushioned the worst of the shocks.
“The biggest surprise is how quickly it felt like things got back to normal,” she says. “Once things opened again [after level four] everyone was pretty motivated and keen to get back out there.
“There was an initial fear that after a month of lockdown everyone would go out and spend up large and then become really cautious again. But that really never happened – the positive sentiment has continued reasonably strong.”
The so called “sugar rush” of pent-up post-lockdown demand has actually carried through the entire year. In the June quarter of 2020, New Zealand saw a record 12% decline in GDP putting us into recession, mostly due to the total halt for a month in the level four lockdown. However, the following September quarter saw the largest quarterly GDP increase on record, driven by surging consumer spending, a hot housing market, and strong exports.
“Generally it feels like we’ve actually been remarkably resilient to what could have been quite a nasty downturn,” Wallis says.
Compared to the rest of the world, the biggest influence on New Zealand’s spending activity is our relatively Covid-19-free status, allowing us to move and consume with impunity. Alongside that, however, were the measures the government took to encourage and stimulate consumer spending and confidence.
In many ways, this is why the Great Depression carried so much portent for economists at the beginning of this year. One of the theories that explains why the Great Depression was so severe was the austerity measures governments of the day took to solve the crisis, which incidentally exacerbated it. The enduring legacy of those failed policies influenced the thinking of John Maynard Keynes, who spawned an entire branch of modern theory called Keynesian economics. It argued, among many other things, that the best government response to a recession was to spend more and stimulate activity – the opposite of what 1930s governments did, but exactly what New Zealand’s government, and many other governments did this year.
The most significant and most emphatic of those measures was undoubtedly the wage subsidy; the $14b fund granted to 759,000 businesses throughout the year.
Zoe Wallis says the wage subsidy did exactly what it was designed to do; give businesses time and space to wait out the slow period, rather than immediately planning for the worst and cutting costs and staff.
“The wage subsidy helped to mitigate knee-jerk reactions,” she says. “I think on the whole we’ve seen this amazing resilience from New Zealand businesses in terms of the number of redundancies and businesses closing.”
Then there was the other suite of financial bolsters the government put in place: the small business cashflow scheme, the business debt hibernation scheme – not as widespread, but all combining to provide the crucial lifeline to New Zealand businesses struggling with slow trade.
The central bank and housing
But the other critical factors that mitigated the slump were the tools implemented by the Reserve Bank. In March this year, witnessing the economic deterioration overseas, the Reserve Bank cut the OCR to 0.25% as part of its monetary policy attempt to stimulate bank lending, and therefore consumer spending and business investment.
Along with its $100m bond buying programme (LSAP) – which aimed to stimulate investment by pumping more money into the economy – it appears from the consumer confidence and retail spending data that the central bank’s policies have been successful.
Of course, the flip side with the low OCR and the Reserve Bank’s removal of LVR restrictions in April was that the already hot housing market saw even further stimulus. With more first-home buyers and investors incentivised by low mortgage interest payments to buy property, they were pulled into a frenzy, driving up house prices to record levels and increasing properties’ appeal as a lucrative investment.
The demand for limited housing and the subsequent inflation has been such that both the Reserve Bank and some retail banks have announced that LVR restrictions will be reinstated to take some of the heat out of the market.
While the government’s swift response this year was seen as critical to avert disaster, the money has to come from somewhere and debt levels have and will rise dramatically as a result. While Treasury initially forecast net government debt to increase to 55% of GDP by 2023, that has since been revised to 52.6% due to the better outlook.
While that debt will invariably need to be paid back by younger generations, Wallis says the amount is still low compared to the rest of the world, and is only relative to how fast or slow our economy grows.
“But it does rely on us inflating and growing our way out of it to a large extent. Essentially, if you’ve got a very slow repayment period, you can kind of inflate your way out if it.
“The caveat to that, though, is if you’re going to borrow huge amounts, now it’s probably the best time in history to do it, given where interest rates are.”
Of course, to say that New Zealand has come through the year unscathed would be an insult to the many people who have lost their jobs since Covid-19 emerged. Although the unemployment rate sits at 5.3%, well below the initial forecasts, the labour market has experienced significant upheaval over the past nine months, affecting different people in different ways.
Mary Jo Vergara has spent a large part of the year focusing on the labour market, and in particular how women were disproportionately impacted.
“I think if we were to look back on this year, and look specifically into the labour market, the most notable event would be how women were most affected by the lockdown.”
Because women made up the majority of workers in the hospitality, tourism and retail industries – which were the most severely impacted by the lockdowns – women were far more exposed than men to trading lulls and business closures.
According to Stats NZ’s June quarter data released earlier this year, of the 11,000 people that lost their jobs, 90% of them were women. While the subsequent quarter’s data wasn’t as stark, it did show that women, in particular Māori and Pasifika, were the most vulnerable to job instability.
“It’s highlighted the fact that women are most vulnerable because of their position in the labour market. And that’s the defining impact of the lockdown.”
Of all the sectors sitting in the firing line of Covid-19, the tourism industry was by far the most exposed – and had the most to lose.
In 2019, New Zealand tourism was our largest export industry in terms of foreign exchange earnings, directly employing 8.4% of New Zealand’s workforce, and generating a direct contribution to GDP of $16.2 billion.
With its prosperity hinging on international travel, it has and continues to be the main victim of 2020.
However, once again Wallis says the alacrity with which New Zealanders embraced domestic travel and adventure is another example of the extraordinary resilience that has defined this whole saga, and helped support the industry.
“We have seen a large increase in domestic tourists. Not being able to go to Australia and other places has meant we’ve seen large volumes of tourists go through New Zealand. And that’s partly offset the loss of the international segments.”
She stresses the partly, saying that even with a booming domestic tourism market, the industry is nowhere near its former earnings. While a prospective travel bubble between New Zealand and Australia next year offered some potential of an expanded market, the arrangement has been compromised by the latest Covid-19 cluster in Sydney.
Ultimately, it’s this kind of unpredictability that has truly characterised 2020. Despite the forecasts, both for 2020 and moving forward, if you ask most economists what they think will happen, they’ll probably be honest with you and say they don’t know for sure. According to the Treasury’s half-year economic and fiscal update, unemployment is forecast to peak at 6.8% in 2022, the economy is forecast to grow 1.5% of the next year, and budget deficit is seen to have already peaked at $23b this year and will gradually to $4.2b in 2024 – all ultimately rosy figures compared to what was initially forecasted.
But of course, the figures are only a guide, a benchmark on which to adjust further forecasts, and, as we saw earlier this year, far from a prophesy set in stone.
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