Liam Dann: NZ gets off lightly in grim global outlook

People stand in a queue for Covid-19 screening at a coronavirus designated hospital in New Delhi, India. June 2020. AP Photo.

The International Monetary Fund's latest global economic outlook report was grim.

The world is being hit harder by the Covid-19 pandemic than was forecast back in April.

America, Europe, the UK and Japan are all facing much deeper recessions than originally anticipated.

The IMF report stuck with its April forecast that New Zealand's economy will shrink by 7.2 per cent 2020.

The New Zealand number came without any attached commentary and, given the report's comprehensive global outlook, it's unlikely they gave us much thought.

The GDP -7.2 per cent figure was smack in the middle of consensus of forecasts by local economists, so I suspect that's where it came from.

But it may already be out of date.

In the past week or so, New Zealand based economists have been revising their outlook up on the basis that we've eliminated Covid-19 and come though lockdown better and quicker than expected.

On Thursday, ASB lifted its 2020 GDP forecast to -5 per cent from -7 per cent. On Friday, KiwiBank lifted its forecast to -6.2 per cent.

Strong domestic activity is great news.

But we're a heavily export-reliant economy and can't ignore the bad news around the world.

A deeper global recession means less demand for our commodity exports and the ongoing spread of the virus makes the return of the international tourist dollar ever more distant.

Even hopes for the quick opening of a transtasman bubble have faded.

High-profile quarantine issues have eroded public confidence on this side of the Tasman.
A spike of uncontrolled cases in Victoria has made it clear the virus is not yet eliminated in Australia.

Quarantine woes: Heavy security presence at the Novotel in Ellerslie where two women who were infected by Covid-19 stayed after returning from overseas. 01 June 2020 NZH. Photo Dean Purcell.

On the bright side, the IMF believes Australia's recession may be less severe than first thought.

Traditional transtasman rivalry aside, that's good news for New Zealand.

Australia is still our second biggest export market – after China.

As mentioned before in this column there is almost no chance of us matching Australia's economic performance through this crisis.

That's simply due to the relative scale export losses from closed borders.

In New Zealand, tourism accounts for around 20 per cent of total exports - that's 6 per cent of our GDP.

In Australia, tourism receipts are just 9.5 per cent of total exports - less than 2 per cent of GDP.

Regardless, both New Zealand and Australia have outperformed other developed nations in keeping the pandemic at bay and we're set to get through the downturn in relatively good shape.

On that note, the most depressing IMF forecast was tucked away in the middle of the report.

The pandemic will likely see a reversal of progress made on reducing global poverty, the IMF said.

The latest projections "imply a particularly acute negative impact of the pandemic on low-income households worldwide that could significantly raise inequality".

The IMF points out that the past three decades have been good for the reduction of extreme poverty across the globe.

The fraction of the world's population living in extreme poverty - on less than US$1.90 a day - has fallen below 10 per cent, from more than 35 per cent in 1990.

But progress is "imperilled" by the Covid-19 crisis, it said.

More than 90 per cent of emerging-market and developed economies are expected to see wages contract.

Poorer countries have high levels of informal employment, which means lockdowns result in immediate income loss, with little or no social welfare support.

The IMF notes lockdown school closures, affecting some 70 per cent of the world's children, will be disproportionately negative for the earning prospects of young people in the developing world.

The report doesn't even get to direct health impacts of the virus in countries where basic medical care is not available for many.

The pandemic is really just getting started in the poorest nations.

The case rate is rising fast in places like South Africa and Bangladesh.

It's already at devastating levels in places Brazil, India, Pakistan and Peru.

People stand in a queue for Covid-19 screening at a coronavirus designated hospital in New Delhi, India. June 2020. AP Photo.

The scale of damage to the poorest countries will be barely visible from the developed world, set against an already impoverished backdrop.

What we never see is what could have been. The opportunity cost is huge.

Even in New Zealand there is a risk that the poorest will bear disproportionate levels of pain.

The economic theory that wealth trickles down has always been contentious, but poverty certainly has no problem flowing in that direction.

As we saw after the Global Financial Crisis, the mechanisms we use to limit wealth destruction can exacerbate social inequality.

Low interest rates and quantitative easing prop up equity markets and house prices.

We traditionally maintain economic stability by looking after those with assets.

But over time that can start erode social stability.

Governments seem more conscious of that now and more ready to spend money to directly support the public in a fairer way.

As the IMF concludes: "Fiscal policies will have to adapt to country circumstances, balancing the need to protect people, stabilise demand and facilitate recovery."

We should be thankful we live in a nation which can afford to run policies that look like they are straight out of the IMF's recovery playbook.

Many countries simply don't have those options.