Covid-19 curveballs keep coming

It has been a dramatic year on the road to recovery from last year’s big lockdown, with more twists and turns than a whodunnit novel.

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Article
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By Nick Tuffley, ASB Chief Economist
date
24 Sep 2021
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4 min to read
Mural with a bunch of random lines

New Zealand has recovered from its past lockdown experiences surprisingly well, though the challenges of protecting our health while reconnecting with the rest of the world could still create a bumpy road ahead.

New Zealand’s economic performance – like its health performance – has been quite remarkable. The economy has got back on its feet quicker than in many countries, while also remaining free of covid-19 beyond the occasional border leak. Very few countries have done so well on both fronts.

By early 2021 the level of GDP was already nearly 1% higher than it ended 2019. The peak drop in employment amounted to “only” 27,000 – so much less than feared at the start of the pandemic. Employment is now 36,000 people higher than its recent peak, with the unemployment rate back down to 4%, where it was just before the pandemic broke out.

Support worked

A lot of this turnaround can be put down to the extraordinary amount of fiscal and monetary support rolled out last year – not just the kitchen sink but the entire kitchen was thrown at the challenge.

The wage subsidy, in particular, seemed to give businesses the courage to hold people in jobs and better position them for the climb out of our collective bunkers into a world of uncertainty.

The March–June lockdown, with all the support provided, was short enough that businesses were in the main able to survive it. And fortunately, the fear of losing our jobs quickly turned into the fear of missing out on a bargain and a good time – and, particularly, a house. 

New Zealanders have enjoyed a huge degree of social freedom, which has been key to enabling in-person interactions to resume.

But there are some factors we should be mindful of, as there has been an artificial nature about the recovery to date.

The impact of the huge degree of government support is waning, and interest rates are on the rise.

Recovery has been skewed towards construction and durable goods spending while people aren’t travelling abroad, meaning some parts of the domestic economy have performed very strongly. But the borders remain largely shut, which is still a huge strain on the tourism and international education sectors – as well as contributing to skills shortages.

"...New Zealand will remain vulnerable to a breach of its border defences - particularly while vaccination rates remain low. The latest lockdown is a brutal reminder of this."

The next 12 months?

So where to from here? The economy is settling into its closed-border and post-rebound state. But there are still adjustments to make and pandemic risks to hold at bay or mitigate.

First of all, New Zealand will remain vulnerable to a breach of its border defences – particularly while vaccination rates remain low. The latest lockdown is a brutal reminder of this.

The very clear lesson from Australia’s latest outbreak is that we cannot afford to allow a Delta variant community outbreak to become entrenched. Right now, and for some months at least, NZ will resort to hard lockdowns to stamp out community transmission. New Zealand will need to remain resilient to coping with occasional shuttering.

The extent of border opening will also be hugely significant. Tourism and education earnings are still missing revenue, and the pace and extent of that recovery links back to the border.

Important is the ability to fill labour shortages and key skill gaps through bringing people into New Zealand. It has become increasingly clear that New Zealand is hitting the effective short-term limits on domestically sourcing key skill gaps and wider labour needs. A focus on advancing people’s technical and life skills is an admirable long-term goal, but it will not fill the gaps in the here and now.

New Zealand’s recovery will be hampered by constraints at the border, as well as experiencing sustained labour cost pressures that are set to feed into wider inflation.

Relaxing our borders

The expert advice to the Government is essentially for New Zealand to stay with its covid-19 elimination strategy while gradually relaxing border restrictions once a high proportion of New Zealanders are vaccinated. With herd immunity unlikely to be reached, maintaining elimination will mean continuation of tracking/tracing, testing, isolation, and – as a last resort – lockdowns. But the higher the vaccination rate, the less disruption there will be.

Against that backdrop, border relaxation is likely to be very cautious and won’t really start until sometime next year. The pace at which tourism, international education and long-term immigration can pick up will be linked to the extent of any travel bubbles and the number of people that are eventually able to bypass part or all of an isolation period in MIQ facilities.

And the latest outbreak raises the question of how compatible the elimination strategy is with further border relaxation – it may be that one of these goals needs to shift.

So, New Zealand will need to adjust itself to a gradual recovery in inbound visitors and slow growth in the pool of available workers.

For organisations, and the directors overseeing them, people and investment strategies will be important. Employee retention, remuneration, working conditions, training and development (particularly for new employees) should be firmly in the spotlight.

Investment decisions should take into account the need and ability to supplant labour and skills that are hard to come by. A strong focus on improving productivity is important given a period of faster wage growth and higher costs of landing imported goods will impact on businesses’ bottom line. Yes, interest rates are still likely to head up, but the environment will still be one of relatively low interest rates that is conducive to funding capital expenditure.

Barring a sustained lockdown, New Zealand’s growth should average out around a 2.5%+ trend pace through to the end of 2022.

Global economic rebound is a bit of a tailwind for the time being. However, we are already starting to experience challenges (labour shortages, inflation, rising interest rates) that normally appear much later in the economic cycle and build more gradually than is happening this time. 

And covid-19 setbacks – here and elsewhere – will remain a fact of life.

It’s going to remain an environment in which agility and adaptability remain important for organisations and those charged with overseeing them.

 

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