MP

Merissa Parkinson

As Covid-19 lockdowns restriction ease in Australasia, we’re seeing the statistics showing ​signs of economic recovery. But is it too good to be true? I sat down with Dr Alan Bollard, ​who was the Governor of the Reserve Bank from 2002-2012 during the Global Financial ​Crisis, and my Economics lecturer at Victoria University. We talked about what we can ​expect from here, as individuals and businesses and what the impact of COVID might mean ​to us in the coming year.

What are your key learnings from the GFC, and how can we apply these to the ​current COVID situation?

The GFC was full of surprises, uncertainties and risks. I learned a bit about ‘the fog of war’, ​where you hear rumours, conspiracy theories and information coming through phone calls, ​but can’t get a clear picture of things at the time. You have to sort through information, and ​work out when you are actually in a position to know what’s going on, and therefore what ​policies to apply. Some things need to happen quickly, but with others, you should wait and ​see.

I also learned about contagion. For example, what is it about the risky mortgage lending ​practices in the Midwest (US), which suddenly spark a full blown contagion around the ​world? When something happens, it could easily impact here. There are also pre-warning ​signs. In 2007, a company called New Century Financial folded. Then, it clicked afterwards ​that it was the canary in a coal mine. We should’ve paid more attention to it but we didn’t ​know about it at the time.

Like in the GFC, sometimes we just can’t get a coordinated response, even though it’s ​needed. Given current geopolitics – for example with nationalism and populism – this isn’t ​likely. The unfortunate timing of US-China tension makes it a bit harder to envisage, say, ​G20 coordinated policies. For COVID, the next crunch point will be the vaccine distribution – ​whether countries will distribute it in a highly nationalistic way. We would hope we won’t go ​from a trade crisis health crisis into a financial crisis. And from that point of view, I think we ​all need to pay a lot of attention to the state of the banking sector.

What do we need to be thinking about as individuals when preparing for a ​recession?

Households didn’t spend during the big lockdowns, but then they’ve been on a bit of a ​spending spree since then. At the moment, households are not spending on overseas ​travel, which are quite big expenditures. So, with the extra cash, we see them reducing ​credit card debts or creating new spending patterns like elective surgeries (like dentistry), ​houses, renovation, landscaping or DIY.

Interest rates are already very low and we’re seeing potentially difficult by-products from it, ​like a bubbling housing market, and a lack of returns to savers. We’ve got really expensive ​housing in New Zealand already. So this causes quite big distributional impacts. ​Reasonably well-off house owners are doing pretty well, and they’re getting huge price ​growth. But those who can’t get into the housing market are disadvantaged even more.

The economy could be splitting between those people who are secure in their jobs, and ​those worried about jobs. Most of the people who claimed the wage subsidy are ​transitioning out of it, but might end up unemployed. We will see the unemployment ​numbers going up. The official unemployment numbers at the minute don’t really mean ​much. Even the forecasted 7% unemployment next year is not terrible by historical ​standards. But it’s impacting on particular groups of people, so it’s not a great time to come ​onto the job market right now.

There’s a significant number of “discouraged” workers who are mainly women because this ​pandemic affected the service sectors, which are predominantly female dominated. This ​also affects particular socio economic groups, like Māori, Pacific Island, and some migrant ​groups.

What do businesses need to be thinking about when preparing for a recession?

In the business sector, we’re currently seeing a three-way split. There are businesses that ​are at risk, like some traditional retailers, hospitality, international inward and outward travel, ​and any of those businesses going through a slow decline because of digital substitution. ​We will see a bunch of them closing.

Then, there are businesses that look likely to survive. Some of them are just being more ​cautious as they wait and see. Some investments are on hold and that will have a negative ​flow-on effect through the economy.

Then, there’s a smaller number of businesses that are doing well. Services like telehealth, ​telemedicine, electronic commerce or digital marketing, are potentially in a very strong ​position.

We could see quite a number of new start-ups during this cycle. This is partly because it’s ​much easier to start new enterprises with digital technologies, and partly because those ​without jobs may attempt it. Some of them will succeed, and some of them could take a long ​time to grow, but there will be a high dropout rate from them as well.

All around the world and in New Zealand we had very major negative GDP numbers. This ​year, the IMF states NZ’s GDP is going to contract by 6%, which is roughly the same ​worldwide. Next year, we think it will grow by 4% so we’re not better. Following the third ​quarter this year, there will be extremely positive GDP numbers, and we will see a record ​high quarterly upswing. But it’s not bouncing back to where it was. That means that looking ​forward, we won’t be as well off as we thought we’re going to be. We will lose a couple of ​years’ growth out of all of this.

The one thing central banks should be doing is ensuring that banks have got good liquidity, ​to keep funding to the private sector. We have yet to see what will happen with mortgages ​defaults and business loans looking problematic. That’s when you want the banks to be in a ​strong position with liquidity and capital, and to keep lending going because we are seeing ​investments slowing down.

What do you think the new government will focus on to accelerate the economy?

There’s now some stimulus in the system that will help drive recovery, but what happens ​when the wage subsidy scheme runs off? I expect the government will also look at other ​ways to assist businesses in particular sectors, like the hospitality sector.

I imagine they will see an opportunity to increase training. At the moment, you’ve got ​polytechnics that have a huge amount of extra capacity. You’ve got some areas like the ​construction sector where there’s quite a lot of activity, which traditionally has had a training ​and skills problem. They’ll not only need to think about promoting training but how they ​retain people as well, so trained workers don’t move off to Australia.

They’ve put in place agreements for quite a number of infrastructure projects. So far, we’re ​finding some shovel-ready projects haven’t even started. So we really need to push those ​along because they are meant to be a short-term stimulus. It’s a good opportunity to do ​some things around infrastructure and construction consenting, which is very slow, very ​expensive, involving a large number of institutions, and giving many people very wide ​appeal rights. So, there’s a review of the Resource Management Act going on at the ​moment, which will create some possibilities.

In addition, I think we need to rethink boundary control. At the moment, we have a big wall ​around New Zealand, and if anybody comes in, they have to quarantine. Most countries are ​now up and running and dealing with the world. We’re starting to see offshore businesses in ​East Asia saying, “Is New Zealand closed for business?” or, “How do we get there?”

Many of our businesses have not done face-to-face marketing in those countries for nearly a ​year, except where they have in-country representation – there’s some big costs to it. We’re ​going to find boundary closures becoming quite costly. My expectation is that we should see ​what we can learn from other countries, but it’ll certainly be easier if vaccines come in.

Is there space for innovation?

We’re already seeing some innovation in technology, but a lot of this comes from small ​scale businesses that are not necessarily labour intensive. The big question would be, ​“Would we see big companies locating here?”

Hewlett Packard looked at setting up a big site here some years ago, and decided that the ​number of software engineers that graduated from Auckland and Canterbury universities, ​wasn’t enough for their annual intake. While we have some brilliant IT companies, they’re ​small and they tend to drift offshore, partly because they need to over time.

However, New Zealand is primarily an exporter of milk powder, logs and carcasses – the ​resource end of primary industries. We have material to work on, like wood fibre and dairy ​protein, but there’s definitely a scale issue there. To me, it’s about focussing on the ​resources we actually have, and where we are more high tech is in animal products.

Is it all doom and gloom?

It will get clearer when we understand when a vaccine is going to happen – is it going to be ​guaranteed, is it going to be easy to produce, is going to be well distributed? Then, are ​people going to take it or not? I think we’ll know more about that in six months’ time. Then, ​we’ll be able to understand what economic recovery looks like.

In the meantime, there is a lot of talk about “Don’t waste a good crisis”, and it’s a great time ​to do radical things. In a way, people are prepared to think outside the box at the moment, ​but it’s not on things that cost money like climate change mitigation.

There’s plenty of business opportunities, but they’re just not available to all businesses. ​They’re available to digitally enhanced businesses in certain sectors.

Right now, I think we have to accept we don’t know everything, or how the economic ​outcomes are going to play out.