Sir Bill English warns businesses to prepare for W-shaped downturn

Thursday, 30 July 2020

Sir Bill English says a “W”-shaped downturn is not something businesses want to consider, but they need to prepare.

Former prime minister Sir Bill English has issued a bleak warning to businesses to prepare for the worst case scenario as “cracks” created by the economic earthquake of Covid-19 become more apparent.

Just like the damage caused to Wellington’s buildings by the Kaikoura earthquake, the true damage to the economy might not emerge immediately, he said.

Wage subsidies had “bought time for thousands of businesses” and there was a sense just from the amount of traffic on the streets of there being a “bounce”, he said.

But the return in consumer confidence would not last and businesses are “reluctant to deal with the fact” that the economy might drop back again, he told a webinar hosted by accounting firm BDO.

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English doubts there will be much action on the border before March.

“A lot of people – starting with myself – don’t want to have to contemplate that even if things have bounced back that it might not stay that way.”

English believed it might be early March before “serious consideration” was given to significantly opening the border, because of developments in Australia, the election and the range of agencies that would need to be involved.

Businesses might find by the middle of next year that they had 20 per cent less revenue as a “W”-shaped downturn took shape, and needed to ask if they could survive on that, English said.

“This is going to be marathon not a sprint. It could be really tough.”

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The problems governments were having dealing with the growth of Covid-19 during the ongoing, first phase of the pandemic and the “decoupling” of Sino-American relations pointed to things getting worse, he said.

“In New Zealand and Australia there have been some pretty hard lessons learnt about what it takes to manage the virus outside of the context of a total lockdown.

“I am pleased we have got through the stage where we were a bit self-congratulatory and complacent.”

The virus had pulled apart what had been a pretty integrated technology, financial and trade relationship between the US and China which would make it harder for Australia – and behind it New Zealand – to “walk the line”, he said.

“China and the US are not going to turn a corner for a long time.

“While everyone is in recession it is a wee bit difficult to believe that we are going to be out of it.”

With stock markets running at record levels in the US and millions unemployed, “political unrest” was also inevitable, he said.

The short-term impact of the Covid-19 crisis on the United States economy should become apparent late on Thursday night, New Zealand time, when the US Business of Economic Analysis is due to release its initial estimate of US GDP during the three months to the end of June.

The bureau reports GDP in a different way to New Zealand’s Stats NZ.

Deteriorating relations between China and the US won’t turn a corner quickly, English says.

Analysts are expecting it to report about a 35 per cent annualised GDP decline, which would translate into about a 10 per cent drop in actual economic activity during the quarter.

Stats NZ won’t report New Zealand’s second-quarter GDP figure until September, when it is expected to show about a 15 per cent drop in activity.

A string of economic indicators has shown New Zealand bouncing back far more vigorously than expected – and faster than other countries – from its Covid lockdowns.

In the latest positive development, accounting software firm Xero reported on Thursday that small businesses’ revenues in June had rebounded to 2019 levels.

ANZ economist Liz Kendall forecast that figures due to be released on Wednesday would show unemployment climbed only relatively modestly to 5.7 per cent at the end of June.

But she said that would “understate the true weakness” of the jobs market, in part because of a lag before displaced workers could be counted in the statistics.

English said the levers the country had relied on in the past to pull out of recession, such as lower interest rates, a depreciating exchange rate and a leg-up from China, were less help this time.

“We are heading into massive deficits. Households will tend to buckle down in the face of that and eventually government will have to tighten up as well.”

He advised businesses to hoard some cash, know what their bank’s limits were, and get to know their customers well to watch for signs of unexpected stress.

“One of the things about this recession is the way it cuts across your usual categories of who is hit and who isn’t.

“Get ready for a long haul.”

English, who now works as a consultant and as a director of companies including Wesfarmers, said “capital and labour” had to move from tourism and some other sectors to those that might grow, such as “digitally oriented activities”.

“That means businesses failures,” he said.

He advised against the Government trying to intervene too much in that transition.

“Some of it is the Government just keeping out of the way,” he said.

“You should be concerned about systems that randomly allocate public resource to businesses under pressure.”

Despite calls from some businesses for government assistance in securing rent relief, English said it should not get too involved in the “landlord-tenant relationship”.

People needed access to new skills, but a move to “one national polytech” was the wrong direction, he said.