We are living through one of the most challenging chapters in New Zealand's economic history. Covid-19 has cut a swathe through our economy, with many businesses closing their doors for the last time and jobs disappearing at an alarming rate.
Our border is closed, and likely to remain so for some time. International trade has no doubt slumped as the global economy moves into recession. For many New Zealanders, these are extraordinarily difficult times.
On the upside, government debt going into the pandemic was a little under 20 per cent of GDP – the second lowest in the OECD. This "rainy-day fund" is allowing for a strong fiscal stimulus to cushion the blow for many New Zealanders who have lost their livelihoods to the pandemic.
We are also making great progress in stamping out the virus, giving us options for safely restarting parts of the domestic economy. On balance, it is hard to think of a better place than New Zealand to be right now.
For now, the Government's wage subsidy is helping many workers stay afloat and attached to their jobs. This attachment to the labour market is especially important in parts of the economy where demand is likely to recover as the lockdown progressively lifts. Fast-food outlets are a good early example.
But Covid-19 is massively changing spending patterns, both here and internationally. Many businesses operating in industries hit hard by falls in demand will have little choice but to lay off workers and exit. The tourism industry is perhaps the most obvious example.
As Sir Bill English recently pointed out, these huge swings in demand are reminiscent of the impact economic reform had on the economy almost 35 years ago. Back then, demand for many products made in New Zealand evaporated overnight as subsidies were cut. Many businesses laid-off workers and exited the market. Unemployment spiked to almost 11 per cent in 1992.
In time, displaced workers were reabsorbed into more viable jobs and unemployment fell to 6 per cent by 1996. While difficult and disruptive for people directly affected, this reallocation of workers contributed to strong growth in productivity and incomes in New Zealand over the 1990s.
The lesson from our history is that we will get through the initial chaotic and destructive impacts of Covid-19. Our economy will adjust and displaced workers will find their way back into employment.
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The challenge in rebuilding our economy is to ensure that these future employment opportunities are more productive and pay better than the jobs currently being destroyed by the pandemic.
Creating abundant productive and well-paid jobs in New Zealand is no mean feat. The sad reality for many Kiwis – including people in work – is that New Zealand is a difficult place in which to get by and earn a decent living.
According to the BNZ Wellbeing Survey, more than one-third of New Zealanders were living with some form of financial hardship prior to the pandemic. That number will skyrocket over coming months.
The New Zealand economy's persistently low rate of productivity growth is the reason it is difficult for many to get ahead. The fallout from Covid-19 makes it as clear as day that we need to build a better economy that delivers greater wellbeing for more Kiwis.
Improving productivity and ensuring the benefits are widely spread across New Zealanders must be an overarching objective of the rebuild.
The fact is, even if we wanted to, we couldn't go back to our old economy. The border is closed, meaning no migrants, no foreign students, and no temporary workers coming into New Zealand for some time. And the housing market will be subdued, at best, over coming months.
Yet for better or worse, high inward migration and homeowners feeling wealthy from ever-increasing house prices have driven economic growth in New Zealand over recent years. With those taps now firmly turned off, we need to find and develop new engines of growth for our economy.
Digital technologies need to be front and centre in the rebuild. These technologies are steadily reducing the cost of being far away from world markets and making it more likely that Kiwi innovations get noticed internationally. They carry the potential to expand markets, improve the spread of new ideas, and allow productive New Zealand firms to grow and invest.
We are already invested in digital in the form of our excellent ultrafast fibre broadband network. Courtesy of the lockdown, some of us are also having a crash course in going digital, giving us a glimpse of its potential to make life a little easier and to lower our greenhouse gas emissions. We need to build on this potential. Developing the digital skills of New Zealanders and improving digital inclusion are high priorities.
It may feel like a stretch today, but if we can pull this off, we may in time come to view the pandemic as having sown the seeds for a better, more productive New Zealand economy.
Past pandemics have had huge social and economic impacts that have changed the course of history. Covid-19 will be no different.
We need to use it as an opportunity to think hard about our economic future and how to position ourselves in the 21st-century global economy. Let's get on with it.
- Paul Conway is an economist working at the Bank of New Zealand.