Brian Fallow: Covid-19 means economy looks grim - but look where it started from

Fireworks usher in 2017. No one wants to lose the growth since then, but how big a calamity would that really be? Photo / File

COMMENT:

There are times when it is hard to see the wood for the trees — and even times when you can't see the trees properly because fate has jammed your nose hard up against the bark of one of them.

So when presented with news that some indicator has changed by some percentage, it can be useful to remember that levels matter too — how much whatever it is has fallen from, or rebounded to.

For the foreseeable future, the flow of economic and business news is going to be depressing, a casualty list of businesses failing and unemployment rising as wage subsidies run out.

The latest Westpac McDermott Miller employment confidence survey reflects that, with a net 15 per cent of respondents negative about their own job security.

And since employees are also consumers, that is just another negative indicator for businesses chasing the consumer's dollar.

The latest consensus forecasts compiled by the New Zealand Institute of Economic Research — reflecting the views of economists at the big five banks, the Reserve Bank, Treasury and NZIER — expect private consumption to shrink 10 per cent in the year to March 2021 on a real, annual average basis.

That would wipe out the past three years' growth in private consumption, which in turn represents more than half of all economic activity on an expenditure basis.

But was 2017 so bad? A drop back to that level is unwelcome, but is it calamitous?
The same consensus forecasts have private consumption and business investment back at pre-Covid levels by 2022/23.

In these uncertain times there is an unusually wide range of views among the economic soothsayers. The most pessimistic expect private consumption to still be 12 per cent down on 2019/20 levels by 2022/23; the most optimistic think it could be 12 per cent higher.

To take another example of calibrating the scale, if 10 per cent of the businesses that were around pre-Covid have gone out of business by this time next year, that would be a normal rate of attrition.

Statistics NZ's business demography statistics show that on average over the 10 years to 2019, 10 per cent of the 500,000 or so enterprises at the start of a year have "died" by the end of it, but 11 per cent of those around at the end of the year are commercial newborns.

That testifies to a dynamic business environment that policymakers should be wary of impeding by, for example, propping up zombie enterprises just because they happened to exist on March 1, 2020, especially in ways that might make it harder for start-ups to compete for scarce resources like skilled labour.

For the foreseeable future, the flow of economic and business news is going to be depressing, a casualty list of businesses failing and unemployment rising as wage subsidies run out. Photo / 123RF

The consensus forecasts have the unemployment rate jumping to 8 per cent over the coming year (with one forecast as high as 9.6 per cent) from 4.2 per cent in March, and still at 6.1 per cent three years out.

Surveys of business sentiment are not telling a cheerful story. The preliminary results of ANZ's business outlook survey for June record a net 39 per cent of firms saying they employ fewer people than a year ago and a net 37 per cent expecting to have fewer staff in a year's time.

But a wider-angle view of this has to acknowledge that New Zealand went into the Covid recession with an exceptionally high employment rate: The proportion of people aged 15 to 64 who were employed was 77.7 per cent, the fifth highest in the OECD and well above the OECD average of 69.1 per cent.

And that was despite the supply side of the labour market having been boosted for several years by exceptionally high rates of net immigration, which has now come to an abrupt halt.

None of that is any comfort to someone who loses their job, of course, but from a macroeconomic point of view it is a reminder that the fall in employment ahead is from a relatively high starting point.

Another key influence on consumer sentiment and spending is house prices. Rising housing equity underpins New Zealand households' collective willingness in most years to consume more than their disposable income.

But the Reserve Bank's baseline scenario in last month's monetary policy statement assumes house prices will fall 9 per cent over the remainder of 2020.

That would reverse three years' rise in the Real Estate Institute's nationwide house price index and send the wealth effect into reverse.

But it could have been worse. The bank's May financial stability report reckons that a 10 per cent drop in house prices would push 2.1 per cent of mortgage debt into negative equity territory, where the mortgage is worth more than the property.

A 20 per cent decline in house prices would see 7.5 per cent of the stock of mortgage debt under water. However, without its loan-to-value restrictions the proportion would have been 9.5 and 24 per cent respectively, the bank calculates.

"This leaves most borrowers in a position where they would be able to restructure debt to withstand temporary income losses," the RBNZ said. And fewer non-performing housing loans and mortgagee sales would reduce the chances of a negative feedback loop causing a more severe decline in house prices.

So Graeme Wheeler should take a bow.

When reviewing monetary policy settings this week, the bank's monetary policy committee acknowledged that the move to alert level 1 had boosted retail spending sooner than they had expected and the Budget was more expansionary than expected too.

But they still see the risks as skewed to the downside and are not sure the monetary stimulus delivered so far is sufficient to meet their mandate, which includes doing what they can to support maximum sustainable employment.

More bond buying with freshly printed money remains the preferred option.

But in the central bank's workshop they are busy sharpening other possible tools, including a term lending facility for banks, further cuts to the official cash rate — the plural "cuts" implying the possibility of a negative OCR — or foreign asset purchases on the off-chance that might tug the exchange rate lower.