Finance Minister Grant Robertson, here with Prime Minister Jacinda Ardern during a recent press conference, says there will be a serious impact on the NZ economy in the short term from Covid-19. Photo / NZME
Finance Minister Grant Robertson, here with Prime Minister Jacinda Ardern during a recent press conference, says there will be a serious impact on the NZ economy in the short term from Covid-19. Photo / NZME
LIFE AND POLITICS
Reading stories about the spread of Covid-19, it's the contagion that might infect the economy that's worrying many.
The virus is bad but from a world health perspective, the actions to be taken are relatively straight forward.
What governments should or can do about the economic impact is less certain.
Donald Trump, attempting to give leadership, told us there's no problem and even suggested buying stock in the sharemarket. The Dow Jones promptly fell.
Such misguided optimism obviously doesn't square with reality. Clearly there's an economic impact when multitudes of Chinese factories are shut down, supply lines disrupted, and planes grounded.
Our Finance Minister, Grant Robertson, has said there will be a "serious impact on the New Zealand economy in the short term".
What our Government will be doing, like others around the world, will be considering what action they can take to keep the economy growing.
NZ's private debt is at record levels, almost $500 billion. 156 per cent of GDP. A Mount Cook sized debt compared to China's Everest of debt. Photo / Supplied
Government stimulus spending is being talked about. Tax cuts will be considered. But no government wants to act too heavy-handed, because that could exasperate nervousness.
People might conclude that things must be dire if the government's dropping this amount of stimulus. Therefore I should pull back spending, cancel my weekend in Auckland, put off hiring another staff member.
Economic uncertainty and contraction is not unlike a virus, it can spread from household to business, from farm to tractor importer, from tourism to the retail sector.
All this is well known, which is why business owners, global investors, and politicians who want to be re-elected will be quietly worried.
If the economy goes south for a sustained period, we're in recession territory. Officially that's when GDP, the measure of all economic activity, decreases for two quarters or six months.
If a recession on a global scale were to occur, some might attribute it to Covid-19. But that would be a narrow and misleading view to take. It would be like saying the spark from a farmer's chainsaw was the cause of a devastating wildfire.
Might not the fire be better explained by acknowledging the severe drought and amount of dry flammable material about?
In the case of the economy, the bigger problem, and likely cause of any recession, will be the record amount of global debt. At last count, a cool $257 trillion in US dollars. Three times the size of the world's total economic output in 2019.
New Zealand's private debt is also at record levels, approaching $500 billion, 156 per cent of GDP. A Mount Cook sized debt compared to China's Everest of debt: US$40 trillion and 300 per cent of GDP.
Since the 2008 Financial Crisis, banks and governments worldwide have conspired to keep interest rates low and encourage consumers and businesses to borrow.
Cheap credit might look good in the short-term, but you're still taking a punt with your ability to pay it back in the future.
Bound by the agreement you've entered into with a bank, servicing debt becomes the first thing you must do with any money you have. That leaves less to spend on consumer items, from iPhones to coffees, if income becomes constrained.
For a business, if you haven't got enough cash coming in to service debt, then you're going to struggle to stay in business.
The global debt mountain now looks like a massive problem. The credit which has been used to stimulate growth is now the thing that could constrain growth. A situation that smart economists have been warning about for years.
The global economy is a parched landscape strung out on debt. Making the recession risk "high".
There's another question to ask though: why, with all the cheap credit, has the real economy (minus the boom in house prices and other asset stocks) been so sluggish over the last decade?
My bet is that the global economy is coming up against the limits of what this finite planet called Earth can sustain. Record debt is a symptom of something much bigger unfolding.
• Northern Advocate columnist Vaughan Gunson writes about life and politics.
