Question

Write the Impacts of the COVID-19 Shocks in New Zealand (~600 words)

Use economic models and theories covered in this course (e.g. AD-AS model, neoclassical growth model, etc) to explain how the pandemic affects the demand and supply side of the economy.

TIP: ⮚ You could discuss how the government’s non-economic responses to the pandemic (e.g. social distancing, closing the borders) and how it affects the economy.

⮚ You could contrast the economic effects of different shocks (COVID-19 vs GFC/Brexit) by comparing the growth rate of different indicators (growth, GDP growth, unemployment, etc) at the ‘peak’ of the crisis.

Answer 1

Answer: New Zealand’s economy will endure a shallower recession than previously expected but the coronavirus pandemic will have a longer impact on the country’s finances, according to government projections. The economy likely shrank 3.1% in the June , That’s less than the 4.6%contraction projected in the May budget. The jobless rate will rise to 7.8% by 2022, lower than the 9.8% peak anticipated four months ago.

The government has eliminate Covid-19 with a strict nationwide lockdown has been vindicated by a rapid economic rebound. Still, the government today projected more persistent budget deficits and higher net debt than forecast in the budget. There are signs that the New Zealand economy is robust, and that their plan to eliminate Covid-19 and open up the economy faster is the right approach. The government said, “However, global headwinds and this 1-in-100 year economic shock will have a long-term effect on the government’s books”.

The economy benefited from spending just seven weeks in lockdown, while a government wage subsidy cushioned the impact on household incomes. Official data confirms the economy contracted for a second straight quarter in the three months through June, the nation’s first recession since 2010, though Treasury and bank economists have significantly scaled back the expected severity of the slump. Treasury tipped a 16% contraction, much less than the 24% it forecast in May, and said there are risks the decline may be even less. Still, in the medium term GDP growth is projected to be slower than the budget showed. Growth will average 2.8% over the period to June 2024, down from 3.9% in the budget.

“While the outlook for the year ahead is firmer, the Treasury now expects a less vigorous rebound in the following years, with the level of GDP remaining even lower than in its budget forecasts.

Closed Border:

The long-term recovery is slower than previously expected because of the more persistent impacts of coronavirus and predictions of a weak global economy impacting on trade and tourism. New Zealand’s border is assumed to stay closed throughout 2021, although there may be scope for some relaxation from the third quarter as a result of safe travel zones, the Government said he wants to open the border earlier than Treasury has assumed if it can be done safely.

A weaker world outlook and slower pace of domestic recovery means nominal GDP will be about NZ$13 billion ($9 billion) less than projected over the four years to June 2024. That will curb tax revenue and build pressure on the budget position. At the same time, government spending balloons as it provides fiscal support to the economy, with expenses reaching 39.4% of GDP in 2021.

The budget deficit is projected to widen to NZ$31.7 billion in the year ending June 2021 from NZ$23.3 billion a year earlier. Deficits are likely to narrow but won’t disappear until at least 2034.

Net debt is expected to surge to NZ$130.2 billion or 43% of GDP at June 30, 2021. By June 2024 debt will blow out to NZ$201 billion or 55.3% of GDP –- a slightly higher ratio than projected in the budget because the economy won’t be as big.

Still, low interest rates mean finance costs are forecast to reduce, while an improved government cash position will allow the Treasury to reduce its debt program. New Zealand Debt Management today cut its 2020-21 bond sales program by NZ$10 billion to NZ$50 billion.

As COVID-19 has wreaked havoc on global supply chains in 2019-20, the risks of international interdependence have become increasingly obvious. Many sectors of the New Zealand economy heavily rely on foreign suppliers for vital goods, such as medical equipment, and have struggled with the recent sudden changes in global trade. New barriers to trade have emerged rapidly due to closed borders, travel bans and export restrictions. As a result, globalization in New Zealand is anticipated to take a hit from 2020-21 onwards. Local firms are expected to re-evaluate their supply chains in terms of global risk. On top of the COVID-19 outbreak, New Zealand firms are forecast to increasingly hedge themselves against geopolitical factors, such as escalating tariffs between the US and China, and disruptions caused by Brexit, as individual countries aim to become more self-reliant.

Reshoring New Zealand Manufacturing

The New Zealand Manufacturing division has grown slower than the overall economy over the past decade. Many firms have offshored manufacturing capacity, seeking to benefit from lower operating costs in countries such as China. However, reshoring is anticipated to become increasingly common over the next five years, as firms re-evaluate the risk of relying on international suppliers. The New Zealand Manufacturing division, which was worth $29.6 billion or 11.2% of national GDP in 2017-18, is projected to benefit from this trend.

New Zealand could minimize its exposure to supply shocks in foreign economies by propping up domestic manufacturing of vital goods, such as those produced by the Medical, Surgical and Scientific Equipment Manufacturing industry. This industry’s capacity has become a particular point of contention, as countries around the globe have experienced critical shortages of medical supplies such as face masks, due to foreign supply disruptions. Producers of goods deemed vital to national interests could benefit from greater government subsidization in future years.

More broadly, New Zealand businesses are forecast to increasingly place greater value on domestically manufactured production inputs across all supply chains. Many supply chains will return to relying on overseas products after the outbreak subsides. However, some will remain connected to local suppliers over the long term, as COVID-19 has made businesses more aware of the risks associated with relying too heavily on foreign economies.

COVID-19 lockdown has widespread effects on labour market

In the June 2020 quarter, the seasonally adjusted unemployment rate fell to 4.0 percent, down from 4.2 percent last quarter, while underutilization rose.

In the June 2020 quarter:

• unemployment rate fell to 4.0 percent
• underutilisation rate rose to 12.0 percent
• hours worked fell a record 10.3 percent
• the number of people not in the labour force rose 37,000
• the number of employed people fell 11,000
• the wage subsidy scheme was in place from 17 March 2020.

· With the country in COVID-19 lockdown when the quarter began, fewer people who did not have a job were actively seeking work. People who were not actively seeking work were not counted as unemployed, resulting in a fall in the unemployment rate. However, many of these people were captured as underutilised.

· “Underutilisation – a broader measure of spare capacity in the labour market – and hours worked provide a more detailed picture of New Zealand’s labour market than the unemployment rate alone. This quarter, underutilisation rose from 10.4 percent to 12.0 percent – the largest quarterly rise since the series began, while hours worked were down by over 10 percent – another record,” labour market and household statistics senior manager Sean Broughton said.

Slight fall in employment and jobs

The employment rate fell to 66.9 percent in the June 2020 quarter, down from 67.5 percent last quarter. This reflected a fall in the number of people employed (down 11,000) and a rise in the working-age population (up 20,000).

The fall in the number of people in employment and unemployment this quarter resulted in the labour force participation rate falling to 69.7 percent, down from 70.5 percent (revised) last quarter.

The number of people not in the labour force rose (up 37,000) this quarter, while the number of people in the labour force fell (down 17,000). This was the largest fall in the number of people in the labour force recorded since the global financial crisis.

Filled jobs, as measured by the QES, fell 10,800 in the June 2020 quarter to 1,989,400.

Differences between the filled jobs in the QES and employment numbers in the HLFS can largely be explained by differences in survey coverage. The QES excludes a number of industries, including agriculture, and those who are self-employed without employees, to better fit international standards. Conversely, the HLFS only includes usually resident New Zealanders, so can exclude some temporary seasonal labourers.

The wage subsidy scheme was in place throughout the June 2020 quarter. Over three-quarters (77 percent) of businesses surveyed in the QES had received a wage subsidy.

The monthly Employment indicators: June 2020 (MEI) provided an early gauge on employment this quarter. These showed a substantial fall in the number of filled jobs in April, followed by recovery in May and June. When averaged to create a quarterly measure, the MEI indicates that the seasonally adjusted number of filled jobs fell by 20,131 between the March and June 2020 quarters.