New Zealand is staring down the barrel of a recession

Tuesday, 2 November 2021

New Zealand is staring down the barrel of a technical recession as Auckland and Waikato remain locked down.

OPINION Infometrics economist Brad Olsen pauses, and seems to take a big breath before he utters the “r” word. Economists hate being on the hook for predicting recessions

An oft-repeated joke has it that economists have predicted nine of the last five recessions, so you can understand why he might be reluctant to repeat their mistake.

“Our model is currently showing that economic activity in the fourth quarter is looking to be 10 per cent lower than normal,” Olsen says.

“And that is going to be a second decline in economic activity,”

* Lockdown slows Auckland rents down

* Axis of chaos: Supply chains, energy and inflation

* Business confidence in economy slips, but employment intentions remain strong

Auckland central has lost an estimated $1b in revenue since lockdown began according to Heart of the City figures.

A recession is defined as two consecutive quarters of negative growth, so yes: “We are staring down the barrel of a technical recession.”

Perhaps unsurprising given both Auckland and the Waikato are locked down, but the worrying thing is we may not bounce back out of it quickly enough, even after Auckland and the Waikato transition to a lockdown-free set of traffic light restrictions.

A business-owner in Manukau I speak to has claimed both the wage subsidy and the Covid-19 resurgence payment, every day he runs into people surviving on the wage subsidy alone.

“And with the wage subsidy being equivalent to about $15 an hour. For them, that’s way below what they would actually earn at their jobs,” he says.

Infometrics economist Brad Olsen says their numbers indicate the country is now in a technical recession.

A hairdresser I know of has taken to doing illegal cuts in their open garage (the open air might mitigate the Covid-19 risk, she reasons), and it is easy to see why.

The wage subsidy sits at $600 per week (up from $585 when the pandemic started). Once tax of $84.49 is taken out and $36 in KiwiSaver she ends up with $479.51 in hand.

Which is great if you live rent or mortgage-free, but she doesn’t. Take an extra $300 off for rent. Now you are left with $25 per day, $8 per meal, not even enough for a Big Mac through Uber Eats.

Our wage subsidy scheme was initially quicker to roll out and more upfront than those seen in other countries.

However, it is not as generous. In the United Kingdom workers were ‘furloughed’ on 80 per cent of their pay – although they had to send their workers home – France paid 70 per cent of people’s salaries with 100 per cent compensation for people on minimum wage, while Ireland offered 85 per cent of a worker’s net income.

Our workers had it better overall because the wage subsidy wasn’t needed for very long, and afterwards wages and inflation took off.

Danu Abeysuriya says “green shoots” will spring up from Covid-19 when there is more certainty around the future.

Now that Auckland is coming up to three months in lockdown there is a yawning financial gap for many workers.

There will be those who have coped just fine, but there is a question-mark over whether they will still be willing to spend if the world outside is looking more unsafe, or, if they fear for their own future economic security.

This has been made immeasurably worse by the uncertain regulatory environment governing all of this.

Viv Beck says the country needs to move from a “lockdown” mentality to a more enabling one.

During most downturns you get “green shoots”. Some businesses go bust, but others spring up to take their place, while older businesses pivot.

The problem this time around is it is unclear what businesses should be pivoting to.

All these shifting objectives from alert levels to picnics to elimination to traffic lights, have created a lot of uncertainty around what people can reasonably expect.

Then there are the inconsistencies. People can have picnics, and outdoor gym classes, dentists can operate at level 3 step one, but it is apparently absolutely impossible for any hairdresser to operate safely.

In such an unpredictable environment it is difficult for innovative entrepreneurs to figure out what principles they should be designing solutions around.

Danu Abeysuriya, chief technology officer of Rush Digital, the tech firm who helped create the Government’s Covid-19 tracer app, expects “green shoot” businesses to pop up, but acknowledges uncertainty is the big reason they haven’t.

“What we need from our leadership is what we’re going to do as a permanent solution, because there are permanent parameters to this that don't shift.”

Auckland central has lost $1b in revenue since lockdown began. The majority of the country’s economy might be able to keep moving under these split-level systems, but 85 per cent of central Auckland’s can’t.

Viv Beck, chief executive of its business association, Heart of the City, believes the Government has to move to a mindset of enabling business to open up, rather than a “lockdown” mentality where everything is automatically off the table.

“At the end of the day we need to be enabling safely, so that people can get moving safely.”

New Zealand has been at the head of the Covid-19 pack, but in recent months it has felt like we are more like the kid lagging behind at cross-country who suddenly gets lapped.

We told ourselves nobody was ahead of us, yet on some issues we’ve fallen behind others because we haven’t built up the capacity to cope with Covid-19 in the community.

Now we will have to move fast if we want to bounce back like we did last lockdown.