Whoever wins the election faces daunting hurdles. In part two of the New Zealand Listener's focus on New Zealand in the global pandemic, leading economists look for the best way forward.
"Pivot" is the buzzword of our post-Covid response. With the workforce plunging at a pace with GDP, New Zealanders are pivoting – some to new jobs or working from home, others, unfortunately, to benefits. Meanwhile, firms pirouette in search of new core business. And if the country is to emerge from the pandemic in reasonable shape, leading economists warn a lot more pivoting will be needed: from short-term monetary stimulus to economic restructuring and from tourism-dependent service industries into high-tech and value-added products that find a niche in disrupted global supply chains.
It is an area, the late great Sir Paul Callaghan once said, in which New Zealand really thrives, and Auckland-based Helix Flight Manufacturing Machines fits the mould well. The company makes machines and software that produce from metal one of nature's wonders: the helix. This corkscrew shape, when forged in steel, is integral to all sorts of equipment and machinery, from augers and agitators to conveyors and even marine anchoring systems.
These helices are known as flights, and Helix Flight knows how to make them to a higher standard and in less time than anyone else in the world. Its helices are used around the globe, ranging from robotics factories in Japan to the dams that protect the Netherlands.
Helix Flight started 2020 with a sense of anticipation. "Our customer base was expanding, our global footprint growing," says founder and managing director Daniel Coats. "Then the pandemic hit, and one by one our prospective new customers around the world joined us in Covid-19 lockdown."
It meant they could no longer come to Helix Flight's factory to examine its machines. Nor could its engineers visit them. Customers are grappling with what Coats calls the "cat in the bag" dilemma.
"They want to do business with us, but in an industry where precision is everything, and a mere millimetre can mean the difference between a perfect helix and one that destroys a million-dollar piece of machinery, they want to know exactly what they are going to get."
For the first four months post-lockdown, the company saw numerous projects stalled. It responded by switching its marketing focus to essential industries where there is urgent demand for helices. It also had to underwrite more of the risk of doing business with new customers.
"Our supply chain is still operating, our shipping routes secure. But the risk of receiving equipment from the bottom of the world, sight unseen, is too much for some."
The company feels reasonably well placed to weather the storm. It has successfully pivoted to commissioning projects for existing customers remotely, using Zoom video calls and its remote monitoring software to walk clients all over the world through a self-installation process. It is still providing software, online diagnostics and parts and service support to customers. It has a healthy pipeline of enquiries but is now finding it harder to get new deals over the line.
What's needed, says Coats, is for Treasury's export credit office (NZECO) to offer "sale or return" guarantees to prospective customers of New Zealand exporters. "It would give them peace of mind that if they find our products unsuitable, the government will guarantee they are repaid in full."
NZECO does help facilitate guarantees, but the financial risk is borne by a company's bank. With the country in recession and international markets returning to lockdown, banks are trying to reduce their risk exposure. Coats says state backing would cost relatively little compared, for instance, with the Government's $150 million loan scheme to help firms continue their research and development programmes through hard times.
"Without something like this, I fear that some manufacturers in the export sector may not make it through to see better times."
An unsustainable strategy
For six months, our ability to largely keep the coronavirus from our shores, to pour billions of dollars into support for businesses and special benefits for those who've lost jobs, and to allow homeowners to defer mortgage payments has – for most – staved off the pandemic's worst effects. New Zealand has also been fortunate that demand from China for our primary produce remains strong, says Netherlands-based New Zealand economist David Skilling.
But our GDP fell 12.2 per cent (compared with the OECD average of 9.8 per cent) in the June quarter – and 13.4 per cent in the first six months of the year, nearly twice the rate of Australia – as a result of the strict border closure, a lockdown for all but essential services and a dramatic fall in hours worked. Skill shortages are plaguing horticulture and construction because of these industries' inability to recruit overseas.
The virus elimination strategy is not sustainable indefinitely, says Skilling. "The restrictions will constrain major sources of economic activity, at least until an effective vaccine is widely used." Our policy, he says, is quite different from other countries, which are balancing public health with broader economic and social objectives.
With the country in recession and government debt rising, it's time to switch from short-term monetary stimulus to medium-term restructuring of the labour market, he says. "There will be severe economic and social costs if people cannot move across the economy to new opportunities.
"Government policy will need to support a structural transformation on a scale probably not seen since the 1980s to support the transition of workers from structurally challenged sectors, such as tourism and physical retail, to structurally advantaged sectors, such as technology and e-commerce. This will require very substantial investments in retraining and skills upgrading."
Westpac Bank principal economist Dominick Stephens points out that New Zealand bounced back much more quickly than expected from the initial lockdown and subsequent restrictions in March and April. "It turns out that the economy is much more resilient to lockdowns than anybody gave it credit for," he says.
The economic fallout from Covid-19 has been uneven – hitting tourism, hospitality and retail hard but leaving other sectors, such as agriculture, relatively unscathed, he says. "Still others, such as IT, are booming. You can't extrapolate the extreme difficulties some industries are facing to the entire economy."
Kiwibank chief economist Jarrod Kerr shares his optimism. "The closed border is suffocating 5 per cent of the economy. The remaining 95 per cent are less affected."
A new wave of closures and losses
But as measures such as the wage subsidy end, a new wave of business closures and job losses is expected. Unemployment is expected to double from the official 111,000 in June this year to peak at around 220,000 by the end of March. But these numbers don't tell the full story: in June, a further 125,000 people were classified as underemployed – working fewer hours than they wanted to.
The already struggling tourism and hospitality sectors are about to miss out on the summer international visitor peak on which their annual balance sheets rely. NZIER principal economist Christina Leung says tourism businesses will have to find new ways to operate, such as entering new markets or providing a new good or service.
Kerr's stark warning: "Tourism-impacted retailing and hospitality will have to pivot and evolve – or perish."
BNZ chief economist Stephen Toplis warns that even when borders reopen, it will take a very long time for visitor numbers to recover to pre-Covid levels. Retailers face added challenges from accelerated online shopping and, along with the hospitality sector, social distancing. "A number of retailers and many hospitality businesses will not survive this shock," Toplis says. "Many tourism operators will fail."
He, too, suggests government policy needs to focus more on helping people to transition between jobs rather than subsidising people to stay in jobs that have limited long-term prospects.
Stephens agrees. "We can't afford to rescue firms that just aren't going to make it in the post-Covid world. What we should aim to do instead is facilitate redeployment."
The hospitality sector feels abandoned. Hospitality Association chief executive Julie White says the industry, which employs 170,000 people, is braced for casualties over summer. "The telltale is coming and it's not going to be pretty. It seems most other sectors have got support but not the hospitality sector."
White says the sector is seeking specific support such as deferred-payment loans. "If we keep businesses open, money will circulate and people will remain in employment instead of shifting on to a benefit, so the quantum of debt won't change." It also wants help with staff training and accreditation, "so they can be at the head of the queue if they're made redundant".
With most of the $62 billion Covid-19 support package now spent and wage support ending, economists expect other sectors to struggle, including pockets of manufacturing, commercial property and construction. The Treasury says lower demand as household incomes and population growth decline may lead to projects being delayed or postponed.
Toplis warns that struggling heavy industries are vulnerable. The threatened closure of Tiwai Point "may be just the start". After months of uncertainty, Bluescope Steel has signalled up to 200 job losses at the Glenbrook Steel Mill and Pacific Steel.
ANZ chief economist Sharon Zollner says we've yet to feel the full effects of the sharp slowdown in growth of our main trading partners. And although the housing sector has "responded enthusiastically" to record-low interest rates and the removal of lending restrictions, immigration is plummeting and population growth will be dramatically lower while border restrictions remain. "We expect the housing market to experience some decent wobbles before all this is done". The Real Estate Institute says year-on-year, house prices rose 16.4 per cent in August, albeit on low volumes. Treasury is factoring in a 5 per cent decline in house prices by June 30.
Moving into growth areas
The solution for most struggling sectors, economists agree, is to invest in retraining and upskilling to help people move into growth areas. Leung cites food production as one such growth area. Investment in transport and connectivity – allowing businesses to reach customers and people to work and learn remotely – will also help, she says.
Stephens says Covid-19 will accelerate the digital transformation of the economy, though this often generates a "winner-takes-all global market. That often means more revenue for San Francisco or Shanghai – think Netflix vs TVNZ, Airbnb vs Bookabach." Yet digital transformation should also create opportunities for firms to become global champions in particular niches, he says.
Skilling says low immigration will dampen GDP growth and worsen skills shortages. "This will create incentives to move to a more productivity-driven economy. Policy has an important role in supporting this transition: training and upskilling workers and supporting new investments by firms to improve productivity."
Kerr adds that the "inevitable" reallocation of resources towards more productive firms and processes will have benefits. "The faster adoption of productivity-enhancing technologies such as AI and automation seems obvious."
He notes that the industries hardest hit to date by Covid-19 tend to employ more women, but the infrastructure jobs being created are male-dominated. He suggests jobs could be expanded in areas prone to underinvestment, including health, education and the environment. Small-business grants could help affected firms to adapt and may encourage new ones, he suggests.
Paying it back or spending more
Some argue that with interest rates heading into the negative and New Zealand's favourable credit rating, the Government shouldn't worry unduly about how quickly Crown debt is repaid. Net Crown debt as a percentage of GDP has risen from 19 per cent at the beginning of 2020 to 27 per cent and is forecast to reach 55 per cent by June 2023. But Kerr says after decades of underinvestment, infrastructure projects can now be financed easily. "The Government has the ability to fast-track progress in environmental areas, borrowing at very low or even negative interest rates. We have our 'once in a generation' chance to right the wrongs of the past."
Toplis agrees: "If the Government and local authorities are going to spend money to prop up the economy, then spending on projects that will deliver long-term benefits – for example, three waters projects, transport systems and energy transmission – would seem a good idea."
Left-wing think tank Esra (Economic and Social Research Aotearoa) advocates borrowing to invest in housing, infrastructure and climate change mitigation and to address inequalities, rather than austerity measures. "By encouraging economic growth, the state's tax base will expand, giving it more money to pay off debt in the long run," says an Esra discussion paper on "future proofing" New Zealand. Researcher Jack Foster says tax changes affecting housing gains and wealth, or "helicopter drops" of money to low-income households, are other ways to boost revenue and stimulate the economy.
But independent economist Cameron Bagrie warns there is a limit to borrowing – especially when Covid-19 is not the only fiscal black hole on our horizon. He says borrowing big has been the right policy response, but the rising costs of NZ Super and healthcare as the population ages are "problematic".
Bagrie says some element of spending restraint will be needed, though our most recent taste of austerity, after the Christchurch earthquakes, left "infrastructure deficits". He says another politically fraught option – asset sales – could be considered (see page 32). "The Government spending more provides a temporary fillip. The ideal option would be to achieve faster economic growth to generate more tax revenue and get people back into work. [But] lifting the trend in growth is easier said than done. We are not going to achieve it by tinkering.
"If the current crisis cannot bring an appetite for major change in areas such as local government reform, education, infrastructure and embracing foreign direct investment, then odds are it will never happen. We need long-term strategic thinking and the ability to execute. The latter is a major problem."
Populism and the backlash
Consultant economist Shamubeel Eaqub says the challenge is made bigger by global trends including populism, fragmentation and the backlash against globalisation and "experts".
"The future will not have the kind of neat, organised consensus that shaped recent decades. Instead, we are living through regime change," Eaqub says.
"How do we protect lives and livelihoods in the biggest recession in a century, and then how do we rekindle a recovery that does not repeat past mistakes?"
Toplis says the Government must not try to pick winners but can play an important role in facilitation – negotiating free trade agreements, keeping freight transport links open, providing correct infrastructure and ensuring effective border control.
"Policy settings simply have to remove barriers to doing business and allow businesses to benefit from their successes."
Reporting by Peter Griffin and Geoff Cumming for New Zealand Listener.