COVID-19 economic analysis – 20.05.2020
The following is an overview and commentary on economic information available from Treasury, the Reserve Bank, and the Government’s 2020/21 Budget on the impacts of COVID-19. As such it widely reformats or directly quotes the available documents and adds commentary from a wide range of sources.
Over the last week a number of significant economic forecast updates have been released. On successive days The Reserve Bank released its May 2020 Monetary Policy Statement, the Government released its 2020/21 “Rebuilding Together” Budget and the Treasury released its weekly economic update.
The focus of the 2020 “Rebuilding Together Budget” was jobs and as such this update will focus on the predicted impact of COVID-19 on overall output and unemployment, spending time to examine benefit numbers using information released by Ministry of Social Development since May 8. It will also cover the fiscal impact and jobs focus of the 2020 Budget.
THE ONGOING STORY OF NEW ZEALAND’S LOCKDOWN POLICY
It is still too early to judge the long-term economic and social impacts of our chosen strategy in comparison to other countries. What is clear at the moment is economic uncertainty, negative sentiment and downside risks abound.
Both the Treasury and the Reserve Bank point out, our overall level of economic activity and hence economic recovery, depends on policy choices taken around the world with regard to COVID-19. As can be seen in the Chart 1 below, using information made available from the University of Oxford and the Blavatnik School of Government, countries have chosen very different COVID-19 policy strategies. While New Zealand chose an early and very stringent policy path, one that is now opening up, not all countries are on the same policy trajectory. It is also clear that controls once loosened can be re-tightened, if need be, as is evident in China, Taiwan and Singapore as COVID-19 re-emerges. All this means that the unique nature of the economic supply shock is ongoing and hard to predict.
Source: Authors updated selection based on data from the Oxford COVID-19 Government Response Tracker’ (Blavatnik School of Government, May 2020), https://www.bsg.ox.ac.uk/research/research-projects/coronavirus-government-response-tracker.
Not only is the supply side impact hard to predict, it is hard to pull apart and analyse the way specific industries and locations will be affected. Therefore when the Treasury outlined in their 2020 Budget Economic and Fiscal Update (BEFU) that their models assume “that alert level 4 results in activity approximately 40% below normal; level 3, approximately 25% below; level 2, 10-15% below; and alert level 1, 5-10% below,” actual economic activity will be highly sensitive to a particular location’s economic mix.
For example, communities focused on tourism, hospitality, or education institutions that are reliant on students from overseas, will continue to be impacted far more than the 10-15% below pre-COVID levels as predicted by the aggregate models.
Primary producers, may experience an increase in demand. New Zealand horticultural exports to date have been performing well, while dairy and meat exports appearing to be “holding their own.” The ongoing impact will still depend on the ability of other nations to input into the global supply chain, trade relationships remaining friendly and open (some Australian beef and barley producers have been locked out of China following antagonistic political developments) and the relative price of New Zealand primary commodities compared to alternative suppliers as overseas consumers become more sensitive to price. The one upside here for New Zealand is that globally, consumers are generally less price sensitive in relation to their food.
We also know, as Treasury outline in their BEFU, that the “prices for New Zealand’s major export commodities have fallen, reflecting weaker international demand. Forestry prices have been especially weak, compounding the effects of an over-supply prior to the pandemic. Dairy auction prices have fallen 11% and meat prices 12% since the end of last year. Further falls in dairy and meat prices are expected in coming months.” Overall while Treasury sees positive signs in the medium term, in the short term most commentators agree that “weaker economic conditions abroad will reduce export income through lower export volumes and prices.” The lower New Zealand dollar and low price of oil will offset some of the losses.
PREDICTED IMPACT ON NEW ZEALAND’S GDP
With the above in mind, when trying to forecast the overall impact of COVID-19 on output or Gross Domestic Product (GDP) in New Zealand, the Reserve Bank in the May Monetary Policy Statement outlines 3 scenarios with a comparison level being set at 100 percent of GDP in the fourth quarter of 2019 (see Chart 2 below for details).
Their primary or baseline scenario reflects a “v” shaped recovery, the “longer lockdown” scenario results in more of a “u” shaped recovery curve. However, the final or “slower recovery scenario” sees the recovery trajectory being flattened, which is expressed in less of a bounce in the “v” and then a return to pre-COVID-19 economic levels a full year after the baseline scenario, toward the end of 2022.
Source: New Zealand Reserve Bank Monetary Policy Statement Data Pack (table 2.5).
Treasury baseline forecasts on GDP, as discussed in our previous update, are all built on the assumption that by 1 April 2021, all restrictions are lifted (including border restrictions). This assumption has been labelled as “heroic” by many commentators and seems at odds with their own BEFU commentary when discussing the global situation. In the 2020 BEFU the Treasury does note that the IMF is of the opinion that risks to global GDP are skewed to the downside.
(UN)EMPLOYMENT EXPECTATIONS VS REALITY
Turning to forecasts of the unemployment rate (see Chart 3 below), the Reserve Bank forecasts unemployment under both their “baseline” and “slower recovery” scenarios to peak in the 3rd or September quarter of 2020 at around 9 percent. Their “longer lockdown” scenario sees the unemployment rate peak at 12.1 percent of the labour force in December 2020. All three scenarios predict an unemployment rate well above pre-COVID-19 levels (4.2%) over the next three years. Interestingly, the Treasury BEFU baseline unemployment forecast maps onto the Reserve Bank “longer lockdown” scenario until the September 2020 quarter where it peaks at 9.8% thereafter diverging and falling over time to 4.8% by 2024.
Source: New Zealand Reserve Bank Monetary Policy Statement Data Pack (table 2.6) and Treasury BEFU-20 Data (table 1.5).
When looking at predictions related to benefit levels, Treasury BEFU forecasts, see the total number of people on a benefit peak at around 487,500 in January 2021 with 317,300 of these people on a Jobseeker Support Work-ready benefit (JSS). This represents a predicted 230% increase in JSS recipients by January next year.
Over the last two months there has been an increase of nearly 41,000 people claiming a benefit. 94% of this increase are people applying for a JSS. Treasury also report that around 450 people a day are registering for a JSS.
When examining the geographic location of those who has signed up for a JSS since February, it becomes clear that the negative economic shock to firms, and hence employment is impacting the whole country (see Table 1 below). All regions have seen their JSS numbers increase by over 20% since February with the Southern WINZ Region, seeing a massive 35% jump in numbers, going from 7,789 to 10,543 people. Northland has the highest percent of its working-age population on a Jobseeker Support benefit (10.7%) while the Auckland Metro region has seen the largest raw number of people sign up for a JSS over the last two months alone (14,027).
Table 1: Jobseeker Support by WINZ region
In a separate briefing note, the Ministry of Social Development looked at the composition of those who have started receiving the JSS support grants during lockdown. It highlights “that this downturn is impacting a broader group of people than usual, with a greater cross section of society impacted.”
According to their report:
- around half have no benefit history within the last ten years or longer;
- while JSS grants increased across all age groups they were higher for those in their 20’s (see detailed age breakdown in chart X below) with 44% of all new JSS beneficiaries being aged 20-29;
- JSS grants increased across all ethnic groups but particularly so for those identifying as NZ Europeans;
- in contrast to age and ethnicity, the gender composition of new JSS applicants has remained steady with pre-lockdown levels, at 58% male and 42% female;
- roughly 45% of newly JSS applicants have given “ceased work” as their reason for applying for the JSS, while an additional 12% gave returning to New Zealand as their reason (which fits with Statistics New Zealand finding a record number of New Zealanders returning to live in New Zealand or not leaving New Zealand in response to the crisis); and
- those with higher earnings losses have increased as a proportion of the total for new JSS grants during the lockdown.
Source: MSD data-table-monthly-benefits-update-april-2020.xls (Main benefits table) updated 15 May 2020 https://www.msd.govt.nz/about-msd-and-our-work/publications-resources/statistics/covid-19/index.html (accessed 15 May 2020)
WHAT THE REBUILDING TOGETHER BUDGET OFFERS
In response to the predicted impact of COVID-19 on the economy the Government has announced what some commentators have described as a “big, bold, Budget.” The Budget outlines an over $62 billion package to fight the economic impacts on the New Zealand economy outlined above including a $3.2 billion dollar extension to the wage subsidy package. The additional spending over the next four years combines with falling tax revenue to see net core crown debt as a percentage of GDP balloon out from 19.0% in 2019 to 53.6% of GDP by 2023.
The magnitude and timing of the fiscal support is illustrated by Chart 5 below, which tracks how “fiscal policy changes relative to the previous year and stimulates aggregate demand in the economy.” Note that the fiscal “impulse” (Government spending) in 2019/20 is particularly large—well over double the size of the fiscal response to the GFC seen in 2009. The way that the fiscal impulse reduces quickly over the following 2020/21 year fits with Treasury’s economic modelling that suggests the economic will rebound in a V shaped curve rather than a U shaped curve. As already mentioned, many commentators see these assumptions as overly optimistic.
Chart 5: Fiscal Impulse
Source: The Treasury, ‘Budget Economic and Fiscal Update 2020’, 7 Figure 2
It is also worthy of note that while the fiscal impulse is forecasted to reduce from 2021, the Treasury are still forecasting that the unemployment rate will persist at around 6-8 percent over the 2021 year. Some of the reduction in the size of fiscal impulse may reflect that the full effects of fiscal spending often reach their peak after a significant time lag (often thought to be around 2 to 3 years). This would mean that that while the money has been spent in the 19/20 year the effects still drive real world employment effects over the longer period.
THE $23 BILLION QUESTION
A large portion of the Budget’s COVID-19 response package ($20 billion dollars at the time of writing) remains unallocated. Alongside this unallocated fund, there is an extra $3b for shovel ready (employment focused) infrastructure spending on top of the $12b, announced in January 2020. Within the Budget documents there are no details as to how this additional $3 billion dollars will be spent, although the Minister of Finance signalled on May 18 that decisions regarding these projects would be made within the next few weeks. This combined infrastructure spending aims for partnerships with the private sector to create a pipeline of jobs.
All of this direct employment creation spending, however, is predicated on a notion that the government can spend money quickly and the real economy will respond quickly. Unfortunately as already learnt via the implementation of the Provincial Growth Fund and mentioned above there are often significant time lags to be dealt with (often 2-3 years). In the current supply side crisis, the important question to answer is how to assist the economy (and people within the economy) to twist or pivot away from COVID-19 shuttered sectors into sectors that are growing.
One practical example of this “twist” is the way that people and capital previously employed in the hospitality and tourism sectors now need to move toward opportunities in areas of labour shortages—largely associated with our primary industries, dairy, horticulture, viticulture or into the newly created public infrastructure jobs pipeline. This transition will not be easy for many workers or indeed the firms, many of which have been over-reliant on migrant workers holding temporary work visas.
The Government’s response to this need for labour market twisting appears to be multi-faceted. First there is the extension of the wage subsidy scheme in order to “buy” an additional two months of waiting for workers in these affected businesses. Second, there appears to be some sectoral assistance like the $400 million dollars to be spent in the tourism sector. Third, there is the $1.6 billion trades and apprenticeships training package which includes a range of initiatives aimed at retaining or upskilling workers.
- $334m funding for additional tertiary education enrolments
- $320m targeted support for free trades training
- $412m support for employers to retain their apprentices and keep training them
- $276m funding for Workforce Development Councils and Regional Skills Leadership groups, to be established to give industry and regions a greater voice and help them respond to COVID-19
- $141m to support tertiary and trades education
- $32m increased funding to meet demand in Trades Academies
- $50m for a Māori Apprenticeships Fund
- $19m for group training schemes to retain apprentices
- $26m operating and capital for a new online careers advice system.
I think this is the Achilles heel for the Government’s “big, bold, Budget.” This Budget is too backward looking and doesn’t prepare or set enough aside to assist in the economic twist that will be required in many people’s lives. The economic shock and recovery is less likely to be “v” shaped and so going forward New Zealand will need to make the most of viable employment opportunities that already exist. If we were to keep extending wage subsidies we would do employees and employers a disservice by putting off the inevitable, locking people into jobs that are not viable once Government money runs out. This would only offer false hope and slows down the labour market shifts that need to occur.
There are more effective policy alternatives that can improve the economic and labour market twist:
- Temporary hiring subsidies could be provided to firms targeted at people made redundant to compensate for short-run training costs and enable workers to become work-ready and productive in a new role;
- Targeted mobility grants should have been provided to assist workers to moving to new locations;
- The student living allowance or the living-costs loan component could be temporarily raised and lifetime limits adjusted for older workers, to enable people of all ages to continue or re-enter study at a time when the part-time work that currently supplements the living costs associated with study are hard to come by. (There is anecdotal evidence that students are finding the part-time work they traditionally rely on to supplement their living costs drying up as people and firms focus on core spending and workers.)
- Conditionalities can be embedded into the infrastructure package to ensure that private companies that receive Government contracts, hire and train redundant workers and people who have been long-term unemployed in order to meet their skill gaps as quickly as possible. This contract conditionality can be backed up by the targeted hiring and training subsidies discussed above if need be.
Admittedly, these type of initiatives would be expensive and carry significant dead-weight loss, but I would argue these efficiency losses would likely be less than those we stand to encounter if we continue with our current programme of wasteful wage subsidies. The conditionalities would by default increase the costs of infrastructure contracts but on balance this increase will be money better spent investing in New Zealand’s future productivity. Moving away from wage subsidies in declining sectors frees up money for hiring and training subsidies or mobility grants to enable people to move to new locations where firms are struggling to find workers.
The Budget is already committing to spending a lot of money and the focus of this spend should look forward at jobs that will exist, rather than looking backward at jobs that used to be viable. The way our short-term, work-related migration policy shifts over the next year will either reinforce or undermine the investment we make in skills and training. In this regard we would encourage the Government to consider the longer-term payoff for productivity that can arise from investing in people’s skills and education now.
This analysis should not be taken as personal financial or economic advice, as it is subjective opinion based on Julian’s reading of the economic situation as at 20.05.2020 and it does not take into consideration your particular objectives or circumstances. While care has been taken in the preparation of this analysis, this is a fast-moving situation with many unknown elements and unpredictable decisions that must be taken by individuals, organisations, and institutions both local and international.
Julian Wood is a Senior Researcher with Maxim Institute, an economic specialist with published policy papers on regional development and immigration in New Zealand. Previously he worked as a senior policy analyst for the Department of Labour, where he provided the government with advice and research into labour market dynamics, minimum wage and employment legislation, regional development, business dynamics, immigration, and the future of work. Julian holds a First Class Master’s in Social Science from Waikato University with an economics major examining gross labour market flows and testing matching functions in the New Zealand economy.
 Hale, Thomas et al., ‘Oxford COVID-19 Government Response Tracker’ (Blavatnik School of Government, May 2020), https://www.bsg.ox.ac.uk/research/research-projects/coronavirus-government-response-tracker OxCGRT collects publicly available information on 17 indicators of government responses. Eight of the policy indicators (C1-C8) record information on containment and closure policies, such as school closures and restrictions in movement. Four of the indicators (E1-E4) record economic policies, such as income support to citizens or provision of foreign aid, and five indicators (H1-H5) record health system policies such as the COVID-19 testing regime or emergency investments into healthcare.
 The Treasury, ‘Budget Economic and Fiscal Update 2020’, 14 May 2020, 18.
 The Reserve Bank, ‘Monetary Policy Statement May 2020’, 2020, 33, https://www.rbnz.govt.nz/monetary-policy/monetary-policy-statement/mps-may-2020.
 Also interesting is that its recovery trajectory (how the unemployment rate is forecast to lower over time) mimics the shape of the Reserve Bank’s “longer lockdown” scenario, just from a lower peak. It is also more optimistic than the Reserve Bank’s baseline after 2022.
 See https://www.msd.govt.nz/about-msd-and-our-work/publications-resources/statistics/covid-19/forecasts-and-scenarios.html for further detail.
 Eric Krassoi Peach and Julian Heister, 5.
 Eric Krassoi Peach and Julian Heister, ‘Topic Brief: The Composition of Jobseeker Support Work-Ready Grants during the Lockdown in NZ to End April 2020’ (Ministry of Social Development, May 2020), https://www.msd.govt.nz/about-msd-and-our-work/publications-resources/statistics/covid-19/index.html.
 ‘Budget 2020: What Does the “Rebuilding Together” Budget Mean for New Zealand?’ (PWC (New Zealand), 15 May 2020), https://www.pwc.co.nz/insights-and-publications/budget/nz-budget-2020.html.
 The Treasury, ‘Budget Economic and Fiscal Update 2020’, 7.
 António Afonso and Luís F. Costa, ‘Market Power and Fiscal Policy in OECD Countries’, Applied Economics 45, no. 32 (November 2013): 4445, https://doi.org/10.1080/00036846.2013.795275; Dario Caldara and Christophe Kamps, ‘What Are the Effects of Fiscal Policy Shocks? A VAR-Based Comparative Analysis’, n.d., 18; Ethan Ilzetzki, Enrique G Mendoza, and Carlos A Végh, ‘How Big (Small?) Are Fiscal Multipliers?’, n.d., 22; Olivier Blanchard and Roberto Perotti, ‘An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output.’, Quarterly Journal of Economics 117, no. 4 (November 2002): 1347.
 Dominic Harris, ‘Shovel-Ready Projects to Be Unveiled “within Weeks” – Finance Minister’, Stuff.Co.Nz, 18 May 2020, https://www.stuff.co.nz/business/121543932/shovelready-projects-to-be-unveiled-within-weeks–finance-minister.
 ‘Budget 2020 Media Release: Free Trades Training to Support New Zealanders into Work’, 14 May 2020, https://www.beehive.govt.nz/release/free-trades-training-support-new-zealanders-work.