Comment: Finding a path for economic recovery

Head of Wealth Management Research at Forsyth Barr Matt Henry. Photo / Supplied

Forsyth Barr and the Chamber of Commerce are hosting a Parliamentary Election Candidates Forum on September 10. Matt Henry, who is the head of wealth management Research at Forsyth Barr, gives his thoughts on the challenges the country faces in the wake of Covid-19.

A succession of New Zealand governments have prudently managed the country's balance sheet.

Having already successfully navigated the shocks of the Global Financial Crisis (GFC) and Christchurch earthquakes, when Covid-19 hit, New Zealand's sovereign debt was one of the lowest in the world.

However, the lockdown earlier this year required shutting down a large part of the economy. Fortunately, the Government's strong balance sheet enabled a massive programme of payments aimed at preserving jobs and businesses. These measures, which include wage subsidies and income relief payments, are only temporary.

Beyond these short-term packages, government will have a key role in helping the economy recover. Businesses and households will likely be cautious with their spending, meaning the Government will need to step in to replace some of this lost demand. But government spending isn't limitless. Treasury is forecasting government debt to leap from 19 per cent of GDP in 2019, to 44 per cent in 2021.

Higher debt leaves New Zealand vulnerable to dealing with future economic or natural shocks, therefore maximising the effectiveness of government spending today is crucial.

Through the past decade, New Zealand has seen healthy economic growth and has on occasion, been described as a "rock star" economy. Over the past three years, the New Zealand economy has grown at 2.8 per cent a year. Breaking this down, a majority (1.7 per cent) came from population growth. Much of the rest, 0.8 per cent, is from working harder i.e. more people in the workforce, working longer hours. Only 0.3 per cent came from working smarter.

New Zealanders already work the second most hours of the 37 countries in the OECD, (only trailing Mexico in the "club of mostly rich countries"). Immigrants bring skills and can positively contribute to the country's economy, but they also put pressure on housing, infrastructure, and the health and education systems.

Economic growth (or GDP) measures the positive contribution they make, but does not account for some of the challenges a rapidly growing population brings. Unaffordable housing and crowded roads are some of the costs.

Understandably, to date the focus has been on navigating the immediate health and economic threats of Covid-19. In today's world, where economic growth is going to be difficult, and governments will have a greater role in driving economies, New Zealand will need a longer-term plan for recovery.

With the election on the horizon, New Zealand's political parties will be keen to outline (and voters will be keen to understand) their respective visions of what this recovery plan might entail.

- Matt Henry is head of wealth management Research at Forsyth Barr. For further information contact the Forsyth Barr Tauranga office on 578 2737. This column is general in nature and is not personalised investment advice. Disclosure statements for Forsyth Barr authorised financial advisers are available on request and free of charge. Sources: Forsyth Barr Research, IMF, NZ Treasury, Stats NZ, OECD Data 2020