09 July, 2020

It’s a game of two halves

In a three-part series commissioned by New Zealand’s leading investment and advisory group Jarden for its clients, Dr David Skilling examines the impact of Covid-19 on New Zealand’s economy from a global perspective. This op-ed is a summary from the second part in that series and has been provided exclusively to The Herald. Over the three-part series, Skilling explores our Covid-19 response in relation to other countries, whether we are better positioned for economic recovery, and what the longer-term reconstruction and economic recovery phases ahead will involve.

New Zealand has done a world-class job in eliminating Covid-19.  But New Zealand now faces an unprecedented economic challenge, with Treasury budget forecasts of a 10% contraction in GDP and close to 10% unemployment in 2020.  The impact on national wellbeing will be very substantial.

The ‘second half’ of the economic recovery will be longer and more demanding than the ‘first half’ of the initial crisis response.  To deliver a strong economic recovery, New Zealand needs a clear plan.  Without a medium-term plan, the severity of the crisis is likely to create pressures for a short-term oriented approach to the economic recovery effort.  Countries around the world are grappling with these issues, and New Zealand can learn from this international experience in structuring its economic recovery policy.

First, New Zealand needs to prioritise regaining economic momentum. The intensity with which New Zealand approached the control of Covid-19 now needs to be applied to the economic recovery process.  New Zealand has made a good start, with an aggressive fiscal and monetary policy response.  The fiscal support measures (>20% of GDP) are well in line with what other governments have committed, and have been well-designed and implemented.

New Zealand is in a privileged position in having eliminated the domestic spread of Covid-19, and is able to fully re-open the domestic economy with confidence.  Around the world, many developed countries are also relaxing restrictions in order to restore jobs and economic activity.  This is happening gradually in many parts of Europe and Asia, where the growth in new cases has been controlled – and prematurely, in the case of many US states where new cases are growing again. 

Economic activity is returning in these countries – and in New Zealand – but remains well short of pre-crisis levels.  The major drag on the New Zealand economy, aside from the shadow of the lockdown, are the border restrictions that constrain tourism, export education, and migration. 

Relative to other countries, New Zealand is acting cautiously in reopening borders.  To an extent, anchoring on zero cases has reduced our policy options relative to countries with worse outcomes – which are more comfortable with opening borders.  Within Europe, borders have been largely reopened, with a mixture of testing and health checks as well as social distancing measures.  Iceland, for example, a tourism-reliant economy that is almost Covid-19-free, has opened its borders to EU countries with compulsory testing on arrival.  And in Asia, various routes have been reopened for essential business travel, again with testing and other safety measures.

A more creative approach to opening New Zealand’s borders is an important part of regaining economic momentum.  To do this well, significant investments need be made in strengthening the testing and quarantine arrangements and increasing capacity.  Initial priorities should include international students and selected foreign workers, where full quarantine arrangements are feasible on user-pays basis, as well as the trans-Tasman bubble for tourism (together with other selected countries) as conditions in these countries allow.

Second, the government’s fiscal support of the economic recovery needs to be paced.  The post-Covid-19 economic recovery will be an extended process, and policy should be designed for a marathon not a sprint.  Cases of Covid-19 continue to spread around the world, and the OECD and IMF are producing increasingly gloomy global economic forecasts.  A V-shaped global recovery profile is unlikely.  And despite New Zealand’s success in eliminating Covid-19, its economic outlook is weak.

New Zealand has already provided significant fiscal support, with net public debt forecast to exceed 50% of GDP by 2023 (up from 19% of GDP in 2019), the highest for over 25 years.  But the long-lived nature of this shock combined with emerging budget constraints will force some hard choices about the scale and timing of fiscal support.  A structured plan is required for how fiscal resources will be allocated over time. 

It is important that sufficient short-term fiscal support be provided to firms, workers, and households, in order to avoid lasting damage.  However, this needs to be done in a sustainable way.  Although the government has some additional fiscal space, it needs to be careful that it does not unduly front-load its support, running out of space to provide support in the latter stages of the recovery – particularly given the uncertainty of the length of the recovery profile.  Care also needs to be taken not to over-invest in short-term support at the expense of investments to support longer-term transformation objectives.

Third, the design of policy and resource allocation choices over the next few years should be informed by a sharp sense of the strategic priorities for the longer-term transformation of the New Zealand economy.   

So far there is little concrete or explicit in terms of strategic priorities in New Zealand.  Of the roughly $30 billion of CRRF (Covid-19 Response & Recovery Fund) funds committed to date, much is focused on relatively short-term initiatives.  And the specific projects do not yet seem to be informed by a strategic agenda; the infrastructure projects announced are shovel-ready rather than shaped by a climate change agenda, for example.  This is perhaps not surprising given the fast-moving nature of the crisis, but without a clear sense of strategic direction it is more likely that opportunities will be missed.   

The international experience suggests three lenses for this strategic perspective.  There is a sectoral lens: Covid-19 will create sectoral winners (e.g. technology) and losers (e.g. international tourism).  Policy should support the movement of resources between these sectors and should be cautious about supporting structurally challenged sectors.  The second strategic lens is thematic: the response to Covid-19 is seen by many governments as an opportunity to transition to a low emissions economy, to build digital capabilities, and so on.  Investments and actions can be screened on the extent to which they support these strategic goals.  And third, competitiveness: small advanced economies tend to respond to crises by emphasising measures that strengthen their competitive position in global markets, such as investing in skills and innovation.

A strengthened sense of strategic direction is needed in New Zealand’s economic recovery process, to avoid a reactive process that reinforces the current structure of the New Zealand economy.  The allocation of the remaining $20 billion in the CRRF should be shaped by a clear set of strategic priorities.

In sum, New Zealand needs to begin to move with intensity to get the economy moving again; it needs to pace the recovery efforts so that we can sustain the economic recovery efforts over the next few years; and these recovery efforts need to be shaped by a sharp sense of strategic priorities. 

New Zealand should develop a reputation for its economic recovery phase that is as strong as for its initial crisis response.  We have had a very strong first half, delivering a world-class performance.  But that will count for little if we do not build on this performance to deliver an even stronger second half performance to deliver a sustained economic recovery. 

A version of this article was published on the New Zealand Herald on 9 July 2020. 

Dr David Skilling is Director at Landfall Strategy Group, formerly Chief Executive at the New Zealand Institute and a senior advisor to the New Zealand Government.

This article reflects the opinions and views at the time of publication, and is not to be relied upon as a basis for making any investment decision. Please seek specific investment advice before making any investment decision. Jarden is an NZX Firm, a broker disclosure statement is available free of charge at www.jarden.co.nz. Jarden is not a registered bank in New Zealand.

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It’s a game of two halves

09 July, 2020

In a three-part series commissioned by New Zealand’s leading investment and advisory group Jarden for its clients, Dr David Skilling examines the impact of Covid-19 on New Zealand’s economy from...