FINANCE
COVID-19 and the economy THE UPS AND DOWNS, AND EVERYTHING IN-BETWEEN
Miles Workman, Senior Economist, ANZ
In the early days of the pandemic, the very reasonable expectation was that locking down a hefty chunk of the economy for a couple of months would initiate a crisis of confidence, with firms shedding headcount and delaying investment, and households tightening their belts. It didn’t.
A cocktail of economic conditions While confidence did fall off a cliff initially, it bounced back quickly and, in some cases, hit higher levels than before. The economic recession was sharp but so too was the rebound. The lockdown-sized hole in the economy was effectively put on the Government’s balance sheet for taxpayers to deal with another day. It wasn’t just a fiscal stimulus. There was also monetary policy: interest rates were slashed, the money supply was rapidly expanded (via quantitative easing), and restrictions on investor lending were eased on the assumption that housing market confidence had been destroyed and unemployment would rise sharply. But household incomes have proven to be largely insulated, the labour market bounced back, COVID-19 was successfully contained, and most importantly, the fundamental undersupply of houses persisted. So all that cheaper and easier money culminated in a rather crazy pace of house price increases — as well as a significant shot in the arm for domestic demand. Combine this stimulated demand with a reduced economic capacity to supply goods and services to meet it — as health restrictions limit labour supply and productivity globally, and as some capital and labour go into hibernation (such as that related to international tourism), we have ended up with a rather inflationary cocktail
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The Real Estate Institute of New Zealand
of economic conditions. Annual consumer price inflation threatens to touch 6% — a pace not seen since the 1980s (ex-GST). But we do expect official cash rate (OCR) hikes to take the pressure off in time.
The reality of the situation Undoubtedly, the economy was in a very strong, albeit wonky, cyclical position heading into the current lockdown. With everything going to plan, that momentum should stick around on the other side, but the longer restrictions last, the less likely that will become. Construction is booming and retail spending has been strong (despite lockdown impacts and supply shortages). However, there’s still a sizable national net income loss bubbling away in the background with international tourists still missing in action. Some hospitality businesses were barely standing on their feet again when the Delta strain of COVID-19 necessitated renewed lockdown measures. Some businesses won’t survive to see borders reopen to vaccinated travellers once more. So far, we’ve filled the loss in aggregate income with copious amounts of household and Government debt. But it’s simply not economically sustainable to rely on that get out of jail card for long — debt carries a long-lasting legacy.
