Do the health gains of 'lockdown 2.0' outweigh economic pain?
Friday, 14 August 2020
“Lockdown 2.0” would deal a significant blow to the New Zealand economy but allowing the virus to take hold would be much worse, economists say.
Westpac’s economists’ modelling suggests that when Auckland is at level 3, with the rest of the country at level 2, there is a 6 per cent drop in GDP.
Shifting the country’s economic powerhouse of Auckland to level 4 but leaving the rest of the country at level 2 would cut GDP by 15 per cent – a bigger blow than the 12 per cent that GDP would drop if the whole country was to join Auckland at level 3.
Chief economist Dominick Stephens said each week at the current settings would take about $300 million of activity out of the economy. ASB’s economists had suggested $450m a week.
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But he said the long-term impact of another lockdown would be only incremental.
Apart from the travel and tourism sectors, the economy had shown to be capable of bouncing back “very rapidly”.
“There certainly was substantial economic damage from the first lockdown and there will be from a second but much less than we feared. Predictions did not pan out. There were fewer business failures than expected and substantially less unemployed.
“Most, though not all, of the lasting damage to trading activity has been in travel and tourism – you can’t lose the tourism sector twice.”
A report from the Productivity Commission found a net cost for the country of $741m from the extension of level 4 by five days in April, weighing the impact of economic shutdown against the health effects.
But economist Shamubeel Eaqub said the idea that New Zealand would be better off with a lighter lockdown and higher rates of Covid in the community was “bulls…”.
International data from recent months had shown that New Zealand’s economy had rebounded through 100 days of no community transmission much more strongly than countries that still had it circulating.
Even countries without restrictions showed consumer spending down and movement of people significant lower than normal.
It would be better for the economy to eliminate the virus each time it flared up, he said.
“If you don’t eliminate you’ve just lost a lot of output [and] jobs, for no reason.”
Stephens said stringent lockdowns were still the best economic plan because the country could not afford to let the virus take hold.
“If New Zealand loses control of the virus, that would be a game changer for the economy. Around the world, we are seeing a sharp divergence in the economic performance of countries that have control of the virus, compared to countries that do not.
“Countries that have implemented successful lockdowns are generally doing much better economically than countries that have not – illustrating that the ‘choice’ between ‘health and economy’ was always a false dichotomy.”
China largely had the virus under control, even if there have been occasional outbreaks, he said.
“China’s strict lockdown suppressed the spread of the virus, but also saw GDP falling by 10 per cent in the March quarter.
“The benefit of this aggressive action is now evident. GDP rebounded by 11.5 per cent in the June quarter, with a recovery in production levels and the reopening of the services sector.”
The United States was at the other end of the spectrum, he said.
“After US economic output fell 9.5 per cent in the June quarter, we were beginning to see signs of a nascent recovery, including a firming in the jobs market. However, the US reopened its economy early, allowing a second wave of the virus to take hold.”
Unemployment was now rising again, and forecasts of US economic activity had been revised lower, he said.
“All of this suggests that if New Zealand goes into another successful lockdown, it will suffer only incremental additional economic damage, whereas if the virus gets out of control the economy would take a much bigger hit.”
NZIER principal economist Christina Leung said it was hard to know the true counterfactual in any scenario.
“If we had not enforced an alert level 4 lockdown the first time around perhaps the Covid fatality rate would have been greater. Going hard and early was the appropriate response back then.
“However, the Government will be weighing up many things when deciding whether to raise alert levels again – primarily the ability and willingness of businesses and households to go through another alert level 4.
For many businesses, particularly in hospitality, which were already seeing a severe impact on their revenue under alert level 3, a more severe lockdown might spell the end of their livelihood,” he said.
“It is certainly very tricky for the Government in weighing up all these factors in times of such high uncertainty.”