Crisis Note: Brace for impact – readying for a pandemic and recession

The COVID-19 pandemic is causing economic chaos both internationally and in New Zealand. A recession is now inevitable, and the economic ramifications of the pandemic and response will substantially change people’s livelihoods. However, New Zealand is resilient and stands ready to weather this pandemic, and there are actions that can be taken to reduce the severity of the economic blow.

It is important to remember that this is a pandemic, and therefore a health crisis first and foremost. But the economic ramifications for New Zealand will be severe and could surpass the Global Financial Crisis.

This note provides Infometrics’ latest update on the COVID-19 pandemic, how the economic effects could play out, and what options are available to support economic activity as we head into a steep downturn.

International cases soar, as stimulus flows

As at March 15, the World Health Organisation has reported 153,500 cases, and over 5,700 deaths. The number of additional cases each day continues to increase, with more than 10,000 in the past day (see Chart 1).

The rapid rise in cases recently shows the COVID-19 pandemic outside China remains in a phase of exponential growth. The pace of transmission means that an outbreak can grow from a limited number of cases to widespread cases in a short timeframe. This excellent piece provides more details about the case spread.

The rise in cases globally has seen major concerns raised about the pandemic in Europe and the US. As Dr Siouxsie Wiles explains, in New Zealand it is important we both flatten the curve and stop the spread.

The widespread uncertainty globally has led to several key decisions and reactions in recent days, including the following.

  • Central banks globally have reacted swiftly to enact expansionary monetary policy, including interest rate cuts and quantitative easing (QE). So far, major cuts include the Reserve Bank of Canada (100bp), the Reserve Bank of New Zealand (75bp), the US Federal Reserve (150bp), the Bank of England (50bp), and the Reserve Bank of Australia (25bp).
  • Stock markets have plummeted, with the worst day on Wall St since Black Monday in 1987. US markets have entered bear territory, giving up all the gains made over the last year.
  • Governments have announced severe containment and mitigation methods. In Italy and Spain, the governments have imposed a full quarantine; schools are closed in France; and the US announced a 30-day ban for travellers from Europe.
  • Fiscal stimulus packages have been announced, including a £12b package from the UK government and a A$17.6b package from the Australian government. The US government has also announced a national emergency because of the pandemic, which unlocks US$50b in funding for the response.
  • A wide array of sports and other events have been put on hold or are continuing without spectators, including the NBA, the English Premier League, and Super Rugby.

Fortress New Zealand becomes reality

On Saturday 14 March, Prime Minister Jacinda Ardern announced that any person arriving into New Zealand will be required to self-isolate for 14 days (aside from travellers from the Pacific Islands). This stance makes New Zealand’s border actions among the most stringent in the world. Cruise ships have also been banned from New Zealand until the end of June 2020.

Self-isolation will be enforced by health officials, and if necessary, by police, using wide-ranging powers of quarantine and control under Part 3 of the Health Act 1956

The government’s actions are absolutely the right response to control the spread of COVID-19 into New Zealand but are also a gut punch for the economy. The actions will create economic chaos and the worst is yet to come. Business activity will experience a swift decline, and job losses will rise. Comprehensive fiscal stimulus will be needed swiftly.

Nevertheless, from an economic standpoint, maintaining as much control over the spread of the virus is the key objective. New Zealand’s position at the bottom of the South Pacific provides us with a window of opportunity to massively dampen and slow the spread of COVID-19.

Recession is now inevitable – but how bad will it get?

Infometrics is now formally forecasting recession as inevitable, with New Zealand’s economy set for a significant downturn. We continue to assess the economic outlook on a daily basis, with our expectations for economic growth during 2020 being slashed from about 2% to zero over the last week. The risks remain for even lower economic activity.

Our current expectations point towards no additional economic activity in 2020, with three successive quarters of negative growth (see Chart 2).

The unemployment rate is set to rise, with businesses already having reduced hours and now will need to lay off staff.

We expect private-sector non-residential construction activity will soften in line with lower economic activity, but residential construction should, at this stage, continue at pace.

Nevertheless, we expect the housing market to enter a period of hibernation, as New Zealanders hunker down and ride out the pandemic responses. Stock market falls will reduce KiwiSaver and other investments, making it more difficult to raise a deposit. This difficulty, added to lower employment hitting mortgage repayments and the willingness of banks to lend, will stifle housing activity and price growth moving forward.

Time to use the full might of the Government’s war chest

With the downturn set to be severe, the government’s stimulus package will need to be equally as wide-reaching to support businesses and households. People will lose their jobs, but to limit that effect, it is important to focus on supporting local business.

We expect the Prime Minister to announce a massive stimulus package on Tuesday 17 March, totalling about $20b in government spending to support the economy throughout the downturn. In our minds, there are two broad phases of the government’s stimulus (which might not all be announced on 17 March).

  • Firstly, a comprehensive business support package to be implemented within the week, including the following elements:
    • Government funding of sick leave entitlements for the entire self-isolation period for New Zealand workers[1]
    • Government employment support payments to businesses to keep staff employed[2]
    • Possible company tax deferral for New Zealand companies
    • Increased healthcare provisioning to DHBs and PHOs (including re-registering and paying medical staff that might recently have retired, or whose registration has lapsed but can prove competency)
  • Secondly, a stimulus and recovery package for when the spread of COVID-19 has slowed, and economic activity can start to lift again:
    • Cash payments to households raise overall demand[3]

The Reserve Bank has now acted, cutting 75 basis points and taking the OCR to 0.25%. Our analysis of this decision can be found here.

Regions to be hit as tourism activity dives

The tourism sector is set to bear the initial brunt of the economic firestorm, with aviation and cruise operations two clear areas of immediate shock. With other parts of the economy relying on overseas workers to provide wider business, the economic effects will be widely felt. Over the year to January 2020, international tourists spent $12.8b around New Zealand. Chart 3 shows the spending differences across regions.

With the requirement to self-isolate, we expect foreign arrivals to all but cease for an extended period, closing off this spending stream. The government’s initial 16-day closure of the borders is likely to be extended several times given the continuing acceleration of the virus’ spread in Europe and the US.

We expect the accommodation and food services sector (ie hospitality), some retail trade, aviation, and recreational services to see significant job losses. Chart 4 provides an idea of the concentration of sectors across New Zealand’s regions (territorial authority data is available as well – please contact Brad Olsen). As a sector, tourism comprises an outsized share of the West Coast and Otago economies compared to other regions (the latter region due to Queenstown). All regions will require significant support for businesses and workers in affected sectors, but most particularly in these areas.

The regional distribution of employment in accommodation and food services broadly matches employment for the wider tourism sector, with an average of almost 7% of total employment in this sector. Retail trade is more evenly distributed and will also be better supported by domestic customers, although New Zealand consumers are also likely to take a more cautious approach to spending.

Some key areas, such as Auckland and parts of the upper South Island, also have a slightly larger share than other regions in the rail, water, air, and other transport sector. Aviation is likely to be hit sharply by global and domestic travel bans and will require support.

Supporting local businesses key to absorbing the shock

At present, New Zealand’s tourism sector remains the key sector in the spotlight. Other parts of the economy will continue to come under pressure as job losses spread and economic activity slumps.

In many ways, there are limited options for local interventions to assist businesses – central government action (and cash) will be key here. However, New Zealanders can still travel within the country. Domestic tourism and local spending should be considered as avenues to support local businesses that are struggling.

Local agencies, including District Health Boards, Primary Health Organisations, local councils, Chambers of Commerce, Regional Tourism Organisations, and Economic Development Agencies should consider joint taskforces to provide clear and swift action at a local level. These local groups can provide joined-up information about health and economic situations and can also be mobilised rapidly to assist with the roll-out of central government support, by identifying key support channels and areas of greatest need.

At times like this, fear, panic, and uncertainty rule. Local support is a crucial and often overlooked element of keeping New Zealand’s economy moving.

Risks remains firmly to the downside

Our working assumption is that New Zealand will experience a moderate outbreak of COVID-19, possibly somewhat delayed to the onset in other countries. A wider outbreak appears likely to be limited by the government’s strict and relatively early border action, but we recognise that the risk of a more severe outbreak remains. If a more severe outbreak was to occur in New Zealand, it would worsen our economic outlook considerably (ie, almost all economic activity would be suspended). We anticipate the economic recovery could begin in earnest in the June 2021 quarter. In general, the risks to our range of assumptions are firmly to the downside.

1 Back-of-the-envelope calculations show that if 20% of New Zealand’s employed workforce had to undergo self-isolation (assuming 10 days of paid leave and four days of weekends), the cost to the government would be around $1.3b. If 30% of the workforce underwent self-isolation, the bill rises to $2.0b.

2 Back-of-the-envelope calculations show that if the government implemented the same wage subsidies as after the Kaikōura earthquake, and if 10% of the workforce is assumed to be covered over a 24-week period, the cost to government would be $2.9b.

3 Back-of-the-envelope calculations show that if each household in New Zealand was provided with $750 cash, as occurred in Australia, the cost to government would be $1.3b.

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