Covid 19 coronavirus: Life under level 3 - Is New Zealand's economy running at three quarters of capacity?

Logs arrive at CentrePort in Wellington this week, as the lifting to alert level 3 allowed the forestry industry to restart. Photo / Mark Mitchell

Since Tuesday's lifting of Covid-19 alert level from 4 to 3, some of New Zealand's largest industries have been allowed back to work.

Cafes and takeaways have begun operating (in a limited way), construction sites have restarted and logs have begun arriving at ports around the country, for the first time in more than a month.

Exactly how much is happening in the economy may become clearer over time, but a combination of the many thousands of businesses which are still unable to operate and restrictions on those which can, means it will be far below capacity.

As he mulled options for providing commercial rent relief, Justice Minister Andrew Little declared on Wednesday that "75 per cent of the economy is up and running again".

Logs arrive at CentrePort in Wellington this week, as the lifting to alert level 3 allowed the forestry industry to restart. Photo / Mark Mitchell

While hundreds of thousands of people could - in theory - return to work last week for the first time since March, the statement is likely to represent something of a best case scenario, unlikely to be met in reality.

At the very least it is Little's interpretation of a different assumption, which even its creators have little confidence in.

Little's office confirmed the claim was drawn from Treasury documents released earlier in April which estimated how much of a hit the economy would take under a range of scenarios, defined by different periods at different alert levels.

• Covid19.govt.nz: The Government's official Covid-19 advisory website

Under alert level 4, Treasury assumed New Zealand's economic output would be 40 per cent below "normal", while at level three it would be 25 per cent down (Little then took the reverse to be true, that 75 per cent was up and running).

To build its scenarios, Treasury conducted high-level analysis of how much work could be done at home and how activity much was permitted under different alert levels.

Even by the standards of forecasting this is a difficult task; Treasury was making estimates before the Government had finalised what was permitted at alert level 3.

Treasury acknowledged this. "Clearly, the margin of error surrounding these estimates is large."

While estimates vary widely, economists seemed to see 75 per cent capacity at more of an upper limit to activity under the current conditions, rather than the actual level.

"It's an optimal scenario, it's a theoretical scenario, but we're probably not quite there yet," Stephen Toplis, head of research at BNZ, said.

While Toplis believed that industries accounting for 75 per cent of the economy were now free to work, almost none would be doing so as normal.

"Even if all 75 per cent of those people were working, it's highly likely that productivity will have taken a dent because of the difficulties imposed on the operations through things like social distancing, increased hygiene requirements and the like," Toplis said.

While it was possible the economy may be operating at 75 per cent capacity, Toplis said it could be down by a third compared with before Covid-19 restrictions were introduced.

Infometrics estimates that under alert level 3, 74 per cent of workers could be on the job and gross domestic product could be "up to 82 per cent" of what it was before Covid-19.

But Infometrics senior economist Brad Olsen said this represented something like a "speed limit" above which the economy could not travel under the current restrictions, and the actual employment and output was likely to be lower.

Some workplaces would not yet be operational, some building sites would have stopped altogether and while some cafes were open, they would be doing significantly less trade than usual.

"There is more of a go-slow in the economy," Olsen said. "The capacity to get stuff moving is there, but the ability is much more constrained."

Economies adapt to different conditions; activity last week might be different to what it would get to if New Zealand was to stay at alert level 3 for the next few months.

Workplaces would adjust, while workers would feel more pressure to be at work as focus went from a health crisis to a jobs crisis.

As schools and early childhood education centres across the country reopened, only a small percentage of children were back.

Toplis said this reflected a confusing message. On the one hand we should isolate our bubbles to limit spread (with the advice to keep children home from school) while at the same time, it was okay for children to return to school.

"People are doing what they are told, but people are also scared," Toplis said.

Over time, if case numbers and death rates from Covid-19 stayed low, the attitude of both workers and employers was likely to change, amid expectations that many businesses will fail and unemployment will surge.

"Everybody's being very flexible at the moment. No one wants to be the big bad boss that tells everyone that they've got to be back at work. In a couple of months, it's not going to be like that."