Coronavirus: Business and Government will need to join hands to steer clear of 'dark places'

Tuesday, 21 April 2020

Businesses and the Government will have to work 'very closely with one another' to tackle the economic impact of the coronavirus pandemic, Reserve Bank governor Adrian Orr says.

Businesses and the Government will need to work closely together to minimise economic woes, but there is still value in separating monetary policy from fiscal policy, says Reserve Bank boss Adrian Orr.

Orr said the central bank's forecasts were broadly in line with those of the Treasury, and one of the 'better scenarios' would see unemployment rise to close to double-digits.

'You can take yourself to some quite dark places of 20 per cent-plus unemployment,' he said, while saying that wasn't a projection.

He indicated the policy response would require some pooling, or a 'blurring' of skills in the public and private sector.

'Businesses and government are going to have to work together very closely.

* Tough talks are taking place behind Treasury doors

* Government has no desire to own stakes in big firms but wants to 'keep options on table'

* Government could end up part-owning hundreds of big businesses**

'I can see the Government being an equity owner in a lot of businesses under a few scenarios.'

Given the Government had made it clear it did not want to be a long-term owner of existing privately-owned commercial enterprises, that implied 'bringing in skills' and more partnerships, he said.

The support programmes that had been developed so far to assist businesses were the 'end of the beginning at best', Orr said.

'There is going to be so much more ahead.

'Welfare payments, income payments, transfer payments, wage subsidies, direct equity injections – the envelope is growing.'

The Reserve Bank would consider additional stimulus beyond the $33 billion it had committed to quantitative easing so far, he said.

Orr would not rule out the Reserve Bank directly lending money to the Government, rather than only buying central and local government bonds on the secondary market from other investors.

But he said that former 'heresy' came with risks.

'Blurring monetary and fiscal policy together can lead to very relaxed fiscal policy … and high inflation, if there isn't that operational independence to tighten when you need to tighten, when the economy is back on its feet.'

Some of the lessons from the current situation were that businesses should not be over-leveraged, and shouldn't rely on just one debt provider, Orr said.

'Be prepared to work with partnerships and have a lot of different access to capital.

'Highly leverage and so dependent on bank debt alone – that is the financial vulnerability of New Zealand and it has been supported particularly by small businesses borrowing off the back of a household mortgage.'