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Covid-19 and the question of recession

In the coming weeks and months, New Zealanders, along with businesses, banks, the Reserve Bank and the Government will be tested by the reaction – or overreaction – to the global coronavirus outbreak.

The BNZ was the first major bank to forecast a recession – defined as two consecutive quarters of negative growth – in the first half of this year. Therein lies a vexing problem for those whose role it is to comment on crises and to pick a path through them. They need to balance caution against the knowledge that fuelling people’s worries will only make a recession more likely, and possibly deeper and longer, than it otherwise might have been. Yet they also need to be transparent.

As the BNZ said, and as the world has seen by the crash in markets in the past fortnight followed by a collapse in oil prices, this slump is not a cyclical downturn. Rather, it is a shock caused by the Covid-19 scare. So far, this country is demonstrating a greater degree of calm than, say, Australia. This bodes well for New Zealand – not to mention its stocks of toilet paper. But these are early days and the decisions we each make, alongside those of the Government, the Reserve Bank, trading banks and businesses, will set a tone that may determine the severity of the fallout.

Read more: What you need to know about the coronavirus disease

It is hard to be calm when there are visible signs of panic everywhere from neighbourhood supermarkets to Wall Street. The tendency is to join in – to sell stocks, cut KiwiSaver contributions, not hire workers and stop spending – but those responses are unhelpful. They define a fall in confidence, and cutting back on the spending and hiring that fuel commerce and keep people employed contributes to the perception of a problem, as well as an actual downturn.

No one yet knows how long it will be before we can look back and say, “Phew, glad that’s over”, and nor do we yet know how severe this shock might become. Both in how contagious it is and in its fatality rate, Covid-19 is similar to influenza, yet the world does not react like this every flu season. At some point, common sense will prevail, the agitation will fade, the unnecessary stockpiling will cease and eventually there will be a vaccine. The sooner governments and people stop overreacting, the quicker every country will recover.

History teaches us that markets will pick up again – more slowly than they fell, but nevertheless, they will rise. We also know that stimulation, rather than retrenchment, helps economies. We need to use the lessons of the past to dictate our actions. A drop in interest rates may, unfortunately, hurt savers with conservative cash-heavy funds, but on the other hand, a drop of half a per cent could help someone with a $500,000 mortgage to the tune of a couple of thousand dollars a year.

Crucially, there is no need for world trade not to quickly resume its normal patterns, and New Zealand, as a producer of high-quality food, will always have markets.

The Government has shown it is ready to respond with assistance to affected industries and workers. That may provide some reassurance to firms and employees in the front line of the fallout. But the Government has also created problems by, contrary to World Health Organisation advice, banning some visitors, including overseas students, from the worst-affected countries. Consequently, for the education and tourism sectors, the effect of the Covid-19 scare has been immediate. The Government should not be spooked into decisions that heighten the sense of crisis and deepen the losses.

Companies need to ensure, as much as they are able, that the financial pain is not just borne by their most vulnerable workers. Air New Zealand chief executive Greg Foran’s move to reduce his salary by $250,000 shows leadership – his $1.65 million salary would surely have otherwise been a focus of resentment as staff face reduced hours.

The one bright spot in this situation might be the environmental upside. A global reduction in trips to the mall and air travel demonstrate how developed-world lifestyles must change if there is to be a realistic chance of lowering carbon emissions. In fact, this looks like a good time to take a New Zealand holiday, in the absence of the madding crowds.

This editorial was first published in the March 21, 2020 issue of the New Zealand Listener.

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