Brian Fallow: Recovery mission an all-Kiwi affair

Picking up unemployment papers in Florida. Job losses are soaring in the US, our third-largest export market. Photo / Getty Images

COMMENT:

One of the few things we can be sure of, as far as the economic recovery ahead of us is concerned, is that it will not be export-led.

It will have to be an all-Kiwi affair; the rest of the world is going to be no help, as it slithers into a gruesome recession.

At the best of times, we are not very good at earning our living as a trading nation. Since the last recession ended, net exports (exports minus imports) have been a drag on gross domestic product, shaving on average about half a per cent a year off growth.

And as a report from the World Trade Organisation last week points out, global trade in goods contracted in the second half of last year, for the first time since the global financial crisis and only the third time since 1990. It was weighed down by trade tensions, especially between the United States and China, and by slowing economic growth.

Those now count as the good old days.

The WTO's optimistic scenario for 2020 is a 13 per cent contraction in global merchandise trade; its pessimistic scenario is for it to fall by a third.

Most of the economic scenarios the Treasury sketched out for us this week assume that global GDP this year will be 6 per cent lower than expected at the time of the half-year economic and fiscal update last December, when they were looking for New Zealand's trading partners to grow by around 3 per cent this year. The International Monetary Fund's annual World Economic Outlook, released yesterday, arrives at a similar baseline.

On that basis, and implausibly assuming no further fiscal support, the Treasury reckons the unemployment rate a year from now could be anywhere from 9.5 to 24.5 per cent depending on how long we spend on various Covid-19 alert levels.

But on a scenario where the global economic output is 9 per cent rather than 6 per cent weaker than forecast last December, unemployment declines markedly more slowly than it otherwise would. It would, for instance, still be 9.5 per cent in two years' time, compared with 6.5 per cent on the best-case scenario where we get away with just one month at the current level 4 and one at level 3.

The worse case scenario looks more likely.

For one thing, these days services account for around 30 per cent of New Zealand's export income. Two key services exports, tourism and education, face severe disruption so long as stringent public health controls apply at the border.

"Unlike goods, there are no inventories of services to be drawn down today and restocked at a later stage. As a result declines in services trade during the pandemic may be lost forever," the WTO says.

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Meanwhile, world prices for New Zealand's commodity exports fell last month, though that was more than offset by a fall in the kiwi dollar. The Treasury expects demand for those exports to remain strong over the year ahead. But the ability to meet that demand is limited by the drought which has afflicted much of the country.

Then there is the impact of supply chain disruptions on the imported content — estimated to be around 13 per cent — of New Zealand exports.

The current epicentre of the pandemic is the United States, where over the three weeks to April 4, 16.7 million people, or a tenth of the labour force, applied for unemployment insurance. In three weeks. That is an economy falling off a cliff.

The US is New Zealand's third largest export market, accounting for 11 per cent of all exports last year. But 38 per cent of that was services, especially tourism. The IMF expects the US economy to shrink 5.9 per cent this year.

Our largest trading partner, China, has been relatively successful at containing the coronavirus. It accounted for 23 per cent of New Zealand exports last year, a sixth of it services. The IMF reckons the Chinese economy will grow 1.2 per cent this year, down from 6.1 per cent in 2019.

It expects Australia, our second largest trading partner, to see its GDP fall 6.7 per cent this year. Australia accounted for 16 per cent of New Zealand's export income last year but 38 per cent of that was services. It is, or rather has been, much the largest source of visitor arrivals.

By the end of last year the eurozone and Japan were already on the brink of recession. The IMF reckons their economies will contract 7.5 and 5.2 per cent respectively this year, while the United Kingdom, our sixth largest export market, shrinks 6.5 per cent.

So, altogether it's not a pretty picture for our six largest export markets, which last year provided two-thirds of the country's export income.

The IMF acknowledges its forecasts are surrounded by extreme uncertainty.

"The economic fallout depends on factors that interact in ways that are hard to predict, including the pathway of the pandemic, the intensity and efficacy of containment efforts, the extent of supply disruptions, the repercussions of the dramatic tightening in global financial market conditions, shifts in spending patterns, behavioural changes (such as people avoiding shopping malls and public transportation), confidence effects, and volatile commodity prices."

It sketches alternative scenarios with less sanguine assumptions about the pandemic's course, ranging from a 3 per cent deeper decline in world output this year to 8 per cent deeper next year.

World trade never returned to its pre-GFC trend after the last recession. The present shock to the global economy is much worse and so is the likely scarring effect of jobs lost, businesses failed and wealth destroyed.

There was already something of an ebb tide running on globalisation before the pandemic.

The risk now is that a legitimate urge to build more resilience into supply chains will harden into beggar thy neighbour protectionism.

The lessons of the past are salutary here. The US Smoot-Hawley Tariff Act of 1930, and the Imperial Preference regime in the British Empire which followed, turned the Wall St crash into the Great Depression.

And the 1930s did not end well.