Why moving to alert level 1 won't save every business and job

coronavirus 08/06/2020

Moving to COVID-19 alert level 1 won't be the economic saviour many might be expecting, an economist has warned. 

The Government is expected to reveal when the country will further loosen its restrictions, particularly on business operations, on Monday afternoon. We've gone 16 consecutive days without a new confirmed case of COVID-19, 

Businesses are itching to get back to normal.

"The hospitality industry has been under an enormous amount of pressure, which we've gladly done, to assist with the COVID-19 crisis," Marisa Bidois of the Restaurant Association told Newshub, "however we're certainly ready for those restrictions to be completely lifted."

"We've saved lives, now we must save livelihoods," said Wellington Chamber of Commerce chief executive John Milford. "There's no doubt that the severe restrictions of staying at alert level 2 means businesses are struggling because customers are staying away and keeping their wallets closed."

But even at level 1 there's no guarantee Kiwis will open their wallets, says economist Cameron Bagrie. 

"The big question both locally and around the globe, is going to be how is the consumer going to behave?" Bagrie asked on The AM Show on Monday.

"Are we going to get back into it? Or be more conservative with our spending behaviour - more inclined to save for that rainy day, go out a little bit less... I think people are going to be a lot more conservative with their spending. We'll spend a little bit, but not a lot."

Economists have been trying to work out how economies around the globe will recover from the financial impact of COVID-19. While it's expected to be the deepest hit since the Great Depression nearly a century ago, economists nowadays know a little bit more about how to ease the impacts and get economies moving again.

There are three potential recovery curves - V, U and L. In a V-shaped recovery the economy recovers quickly and picks up largely where it left off. A U-shaped recovery also sees the economy bounce back, but it takes a bit longer - perhaps a few years. 

The worst-case scenario is an L curve. In this, growth eventually resumes as normal, but from a lower base - the economic losses experienced in the recession aren't recovered at all.

Bagrie thinks we're in for a U-shaped recovery.

"What does that mean? More subdued growth outlook over the coming six to 12 months - we can overlay a little bit of election-related uncertainty both in New Zealand and particularly in the United States," he explained, referring to November's US presidential election and our own general election in September.

The current civil unrest in the US won't be helping their recovery either, he added, particularly with the virus still an ever-present threat there.

"You've got to appreciate what we're seeing up there in Uncle Sam at the moment in regard to the riots, those marchers? People getting into the streets? Not a good economic story if people want to get out and spend." 

The combined effect of the pandemic, recession and political uncertainty has seen investor confidence slip too, from net 11 percent to 4 percent, according to the latest ASB Investor Confidence survey - the lowest it's been on a quarterly basis since early 2016.

"Big drops in the sharemarket are enough to rattle investors, and in March investors were also experiencing the economic shock first-hand as we went into lockdown," said ASB senior economist Chris Tennent-Brown.

"While we don't have the full second quarter's data yet, we can see that sentiment remained very negative in April, even while markets were starting to recover. We know from our conversations with customers that investors are worried about the longer-term repercussions of COVID 19 on investments."

While the share market has recovered well, the job market hasn't - with predictions of another 80,000 job losses by the end of the year. 

"Equity markets have surged again," said Bagrie. "Some of them are pretty close to recovering some of those losses, which is pretty eye-watering when you consider the economic backdrop - the economic fundamentals, they still look rubbish."

Bagrie agrees with much of the business community and the Opposition that we should already be at level 1 - but isn't optimistic it'll do much good.

"We should be at alert level 1 now - we probably will be in two or three days. Yes, spending is getting a little bit of a boost... But if you look at the backdrop, what have we got? The household savings rate in New Zealand is still negative. Unemployment is moving, people are taking pay cuts. So the outlook for spending in the back half of this year - beyond that initial bounce, I don't think it's that great."