Coronavirus: OECD expects big impact for NZ economy

Friday, 3 April 2020

New Zealand's economy is likely to suffer a bigger coronavirus blow than most in the OECD, new research says.

The OECD has put out a new report evaluating the impact of Covid-19 on economic activity. It does not take into account Government stimulus in those countries.

It said the initial direct effect of shutdowns could be a decline of between one fifth and one quarter in most economies as spending dropped by about a third.

'Changes of this magnitude would far outweigh anything experienced during the global financial crisis in 2008-09. This broad estimate only covers the initial direct impact in the sectors involved and does not take into account any additional indirect impacts that may arise.'

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New Zealand would see an initial drop of almost 30 per cent in activity, the OECD said, compared to about 15 per cent in Ireland, 22 per cent in Australia and 25 per cent in the United States.

The implications for annual GDP growth would depend on the magnitude and duration of national shutdowns, and the extent of reduced demand, the OECD said.

'The scale of the estimated decline in the level of output is such that it is equivalent to a decline in annual GDP growth of up to two percentage points for each month that strict containment measures continue. If the shutdown continued for three months, with no offsetting factors, annual GDP growth could be between 4-6 percentage points lower than it otherwise might have been.'

Christina Leung, chief economist at NZIER, said the effect of the outbreak in each country would depend on how long and successful a suppression strategy was.

'Given the unprecedented nature of the situation, policymakers are having to make decisions with a high degree of uncertainty with irreversibility – you can revive an economy, but you cannot bring back to life the people that have died from Covid-19, and indeed other factors brought on if a healthcare system was to be overwhelmed and out of action. So it makes sense to take the least-regrets approach,' she said.

'It is undeniable that these unprecedented measures of shutting down the economy will have immense costs for each country. However, for countries that manage to get Covid-19 under control, these costs will be outweighed by the benefits of a healthcare system that continues to function effectively and a generally healthy population. The more successful the suppression strategy is, the more likely the economy will bounce back once the lockdown is over. If successful, it might even have looked like an overreaction to undertake such harsh restrictions – it would be hard to discern the true counterfactual.'

Christchurch central city, showing little sign of economic activity.

Economist Shamubeel Eaqub said the report showed the economic impact was going to be significant but did not take into account the efforts being made to mitigate it, such as the Government's wage subsidy.

He said New Zealand fared worse in the OECD comparison because of how the report estimated the impact on various sectors. Ireland was less affected because it had more economic exposure to the relatively untroubled tech sector. New Zealand had more reliance on tourism.

New Zealand businesses might make it through the next two to three months with the assistance of the subsidy, Eaqub said, but what happened after that was not yet clear.

Construction firms aren't set up to deal with a four-week hole in revenue, Gareth Kiernan says.

Once it ran out, those organisations could face returning to a market without pre-Covid-19 levels of customers and revenue.

That could lead to more failures, he said. 'That's the point of the programme, to delay things and buy as much time as possible to do the health stuff. If we can do that, then we can turn out attention to the economic side.'

Infometrics chief forecaster Gareth Kiernan agreed the big question facing politicians was what would happen on the other side of the lockdown.

'Obviously, the longer the lockdown lasts, the greater the risk for any firm that they don't have the cash flow to survive, or that the weeks of missing revenue with ongoing expenses - even somewhat reduced - force them out of business.

'Other businesses will survive but there will be considerable job losses as they are forced to downsize or cut costs. I know that Bauer and Radio Sport are both media-related shutdowns and that there are other factors apart from Covid-19 at play as well, but I believe they are the thin end of the wedge that we will see over the next couple of months. The warning signs from the likes of Fletcher Building and Infrastructure NZ demonstrate the difficulties in an industry such as construction, where the lockdown is creating a four-week hole in revenue that businesses are generally not set up to trade through.

'Although there will be a bounce in economic activity once the lockdown is lifted, the structural hit the economy is also taking means that things will not return to normal, or how they were before, particularly quickly. This prognosis is reinforced by the likely effects of longer-term border closures on demand in the tourism and hospitality sectors.'

He said bank economists were being too optimistic about their GDP predictions into the future.

'In terms of infection control, New Zealand seems to be relatively well placed compared to much of Europe and North America. It's likely that many other developed economies could be in a worse situation than ours on the other side of this outbreak. New Zealand is heavily reliant on trade, but the global economy is probably not going to be able to provide much help for our recovery.'

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