'Curve flattening' and lockdown must succeed to make economic price worthwhile: ASB

Monday, 6 April 2020

The Government has a tradeoff to make sure that the economic and social consequences of its response to Covid-19 aren't worse than the illness would have been, economists say.

ASB chief economist Nick Tuffley said there were early signs that the Covid-19 curve was flattening as the number of new cases reported each day plateaued.

'We can all (tentatively) breathe a sigh of relief to see that our efforts, of staying home and sitting on the couch watching Netflix, are really starting to pay off.'

He said it would be important that the stringent approach to lockdown continued, to give it the best chance of working – because the economic cost would be huge. 'We need to make sure it's successful, we certainly are paying large economic price.'

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He said there was an increasing social cost, too.

'You've potentially got the Government raising $100 billion of debt over a long period of time as a result of the downturn. That's a huge burden that future generations are going to carry.'

There would be higher levels of poverty and lower living standards for New Zealanders in future because of the Covid-19 downturn, he said, as well as other human costs such as more people suffering mental illness. More people could die as a result of those factors, he said.

'There will be a weaker economic base to support everyone. There are a lot of costs like that to trade off… we need to make sure we really make lockdown work and adapt as a country well to the new environment.

The full cost of the lockdown and coronavirus threat won't be known for years to come.

'Every day we are locked down more people are made unemployed and more businesses fail.'

As the Government looked to move New Zealand out of level four, it would have to consider how it balanced allowing more economic activity with containing Covid-19 said,

'It's a balance between health and economy. You can't do one without the other. You need to strike some degree of balance.'

He said it might be possible to eradicate Covid-19 with a long-term lockdown but the economic and social cost could be higher than if Covid-19 deaths had been allowed to continue unchecked.

BNZ economists said people's tolerance for extended lockdown needed to be considered.

'It is wrong to simply frame this debate in terms of economics versus life and death. Yes, right here and now we are making the choice to save lives, more so than jobs, while the Government moderates the impact on the workforce via a number of policy measures.

'But the status quo is not sustainable. Ongoing economic stasis will eventually see the Government exhausting its ability to provide support and businesses will fold even with the help they are receiving.

'This being the case, and we are seeing some of these things already, the outcome will be increased mental health issues - including higher rates of suicide, more heart attacks, strokes and general health issues brought about by stress and/or heightened impoverishment, and long-term health problems, including reduced life expectancy for some, as a consequence of the pressure being faced now. Moreover, as the Government eventually tightens the reins, to repay the costs of the current rescue package, it will also limit the future wealth and wellbeing of the population. To cap things off, we all know this burden will, inevitably, fall disproportionately on those with lower education levels and of lower socio-economic status.

'In saying all the above, we are not advocating a particular set of policy actions. All we are simply doing is highlighting that the road ahead will be a troubled one, and the Government is going to have to make some very tough decisions.

'Importantly, the Government now needs to start giving itself more time to deliberate the decisions it makes to enable it to fully consider the implications of the decisions it makes. Moreover, it remains even more imperative than ever that assistance to those that need it is highly targeted to ensure that the money spent delivers best bang-for-your-buck and is not frittered away by those who do not genuinely need it.'

They said it was possible that some industries that had more inherent distancing, such as forestry, might be able to resume work again more quickly than others.

Kiwibank economists said GDP was likely to fall 12 per cent in the June quarter compared to March and the economy would be 5 per cent smaller over 2020.

'However, it would have been much worse had the authorities not acted swiftly and decisively. But we don't know if New Zealand's lockdown will be extended or repeated in future. And we don't know how households and firms will respond on the other side.

'Our extreme downside scenario shows, of a full shutdown lasting three months, sees GDP contracting 30 per cent quarter-onquarter in the June quarter. This scenario also includes an unemployment rate peaking at 14 per cent, far exceeding the record unemployment rate of around 11 per cent in the early 1990s.'

Westpac economists said the Government was likely to need to borrow an extra $65b in the next four years.

'And with further measures likely to be introduced over the coming months, that figure will likely rise to around $70b. That would result in the government debt to GDP ratio rising from 18.5 per cent now to 40 per cent by mid-2022. That is high by New Zealand standards, but still low by international standards and quite manageable at today's low interest rates.'