06 June, 2020

After the Covid crisis comes the hard grind


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 first part in that series and has been provided exclusively to The Herald. Over the three-part series, Skilling will explore 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.

The international experience as a Covid-19 reality check

New Zealand has been recognised around the world for its high-quality response to Covid-19. As New Zealand transitions from lockdown, it is useful to look broadly at our experience and the options ahead from an international perspective.  

NZ as exceptional

New Zealand’s success in reducing new cases to zero is built on among the tightest lockdown measures in the world, tighter even than Italy and France, going hard and early. Partly as a consequence of these policy measures, New Zealand has generated strong outcomes, suffering only 22 deaths and 1504 cases at the time of writing. 

But New Zealand is not unique in performing well. In Asia, Hong Kong and Taiwan have performed strongly, with better records on cases and deaths per capita than New Zealand. New Zealand’s trajectory of cases per capita is also similar to Australia, that has implemented a more liberal approach to lockdown than New Zealand.

And in Europe, countries like Greece, Slovakia, Austria, and Norway, have also managed the growth in cases down to low levels; and close to zero in the case of Iceland. Borders are being re-opened, and domestic activity is being resumed.

So while New Zealand has handled a very difficult situation in a high quality way, we are not exceptional in this. We can take pride in our record, but we shouldn’t take the publicity about our success too seriously as we move into the hard grind of recovery.

NZ as an island

New Zealand’s remote island location – our giant moat – has supported these strong outcomes. Being able to reopen the domestic economy more quickly, and with more confidence, than others is certainly a positive. But New Zealand is not an isolated island from an economic perspective: New Zealand, along with other small economies, is exposed to the global economic fallout of Covid-19.

Around the world, there is not a direct relationship between initial success in controlling the domestic spread of Coronavirus and the nature of the economic outlook. For small economies it is the nature of the external exposures that matter at least as much. These specific exposures are significant for New Zealand, and it is not clear that New Zealand is better positioned for economic recovery than the rest of the world.

The closure of borders will impact international tourism as well as migration inflows. Relative to other advanced economies, New Zealand is highly exposed to tourism: international tourism generates over 4% of GDP and over 5% of employment. This sector will likely come back slowly, even as our borders begin to reopen gradually. International seat capacity growth into New Zealand will likely be constrained for some time.

Migration inflows have been running at about 1.4% of resident population a year, providing significant support for headline GDP growth. But net migration flows will move to zero, with closed borders likely with many of our key markets (India, China). This will create skills gaps in pockets of the economy (construction, agriculture, care), with frictions likely in the ability for New Zealanders to fill these jobs, delaying the speed of the recovery process.

And these effects, combined with the domestic labour market shock, are likely to put downward pressure on house prices (already very stretched on a range of international measures). In turn, this would lead to subdued private consumption spending, further weakening the pace of the recovery.

New Zealand’s performance in controlling Covid-19 cases does not guarantee a strong recovery because of these material external exposures. It is striking that the IMF’s forecast GDP growth for New Zealand (in April’s World Economic Outlook) is amongst the lowest in the advanced economy group. And other economies that have successfully controlled Covid-19 like Hong Kong, Taiwan, Greece, and Iceland, also have challenged economic outlooks because of their specific exposures to the post-Covid global economy. 

Of course, the failure to effectively control Covid-19 – as in the US – will lead to higher economic costs. But for small economies, it is the international exposures that loom large.

Looking ahead with strategic intent

For New Zealand to do as well in the recovery phase as it has in the crisis phase will require creative, aggressive action on a sustained basis. The recent Budget provides a sense of magnitude of the challenge. The Treasury’s baseline forecast is a contraction of over 10% in GDP in the year to December 2020 and unemployment peaking at 9.8%. A GDP contraction of this size is unprecedented in the official data, and unemployment has not been this high in over 25 years. This will be offset by the deployment of fiscal stimulus, but there are also downside risks such as a second wave of infections in New Zealand or offshore.

This near-term challenge is reinforced by the persistent structural challenges in the New Zealand economy, such as low levels of productivity, innovation, and exporting. And the post-Covid-19 global economy will also have some structural differences, from the nature and intensity of globalisation to new growth sectors. New Zealand needs to move with strategic intent in response, which can be seen in three stages.

The initial crisis response has been handled well to date, but a clear pathway to removing remaining restrictions is needed – along with protocols if there is a second wave. The second stage is to support the recovery over the next 1-2 years, which includes the smart re-opening of borders – where New Zealand is currently moving in a much more cautious manner than others – as well as providing more targeted support to households and key parts of the economy. Fiscal constraints will require hard choices to be made.

The third step is the reconstruction of the New Zealand economy, positioning it for competitive success – for example, leading on the transition to green and digital, with particular reference to New Zealand’s key internationally oriented sectors, as I argue in a recent paper for the Productivity Commission. We need to work backwards, with the design of the recovery phase informed by the strategic direction of reconstruction. This should be the focus of intensive work and debate as a matter of urgency.

New Zealand last faced a shock of this magnitude in the 1970s. But the policy response was not well-judged, leading to a highly distorted, poorly performing economy. New Zealand needs to respond now in an outward-looking way, managing through the crisis in a way that strengthens the New Zealand economy. Many other small economies are already actively thinking and acting in this way, from Singapore to Scotland, and New Zealand will need to move with intensity and purpose if it wants to emerge from this crisis in a distinctive way. 

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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