Ideasroom

A new era of economic uncertainty

As the global economy feels the force of the Covid-19 pandemic, Dr Murat Ungor looks at how New Zealand might fare 

The Eurozone and North American economies have now slid into recession, but will New Zealand follow suit?

Recent data releases from the Organisation for Economic Co-operation and Development’s (OECD) Quarterly National Accounts reveal the negative impact of Covid-19 on the global economy.

The data shows the Eurozone economy shrank by 12.1 percent in the second quarter of 2020 and the United States economy shrank by 9.5 percent.

There is no one specific rule for determining a recession, however a commonly used definition is two consecutive quarters of negative economic growth, and according to this definition, the Eurozone and American economies are now in recession.

According to the World Bank’s Global Economic Prospects (June 2020), the Covid-19 global recession will be the most severe since the end of World War II, and the recent figures support this.

Many countries all around the world experienced very sharp declines in economic activity and posted double-digit contractions in the second quarter of 2020.

The figures for the second quarter of the year reveal detrimental effects of the pandemic in Europe.

According to the OECD data, as of August 15, the Eurozone’s economy was 12.1 percent smaller in the second quarter than in the previous three months, when it contracted by 3.6 percent.

Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, The Netherlands, Portugal, Slovak Republic, Slovenia and Spain make up the 19 countries in the European Union that use the euro as their currency, and comprise the Eurozone.

Many Eurozone countries have already started to report negative growth rates for the first two quarters of 2020.

Germany’s GDP fell by 2 percent in the first quarter of 2020 and the German economy contracted by 10.1 percent in the second quarter.

The corresponding figures are much worse for Italy and France.

Italy’s GDP fell 12.4 percent in the second quarter and the French economy contracted by almost 14 percent in the second quarter.

Austria, Belgium, Portugal, and Spain’s economies contracted by more than 10 percent in the second quarter of 2020.

The Spanish economy, for example, shrank by 18.5 percent in the second quarter. Many other countries have yet to post second-quarter numbers.

North American countries Canada, Mexico and the United States, which are partners in the new United States-Mexico-Canada Agreement (USMCA), each announced negative growth in the first two quarters of 2020.

Recent figures show the United States’ GDP fell by 1.3 percent in the first quarter of 2020 and the American economy contracted by 9.5 percent in the second quarter.

The corresponding figures are much worse for Canada and Mexico.

Canada’s GDP fell 12 percent in the second quarter and the Mexican economy contracted by more than 17 percent in the second quarter.

Governments and central banks globally continue to step up with extraordinary measures to fight the crisis, pledging trillions of dollars in support as they rush to contain the coronavirus and shore up the economic activity.

On March 18, the European Central Bank (ECB) announced a €750 billion Pandemic Emergency Purchase Programme (PEPP), a temporary program to purchase bonds issued by corporates and countries within the Eurozone, to stabilise the monetary policy transmission mechanism in response to the negative forecast for the Eurozone.

Christine Lagarde, President of the ECB, tweeted regarding this announcement, “Extraordinary times require extraordinary action. There are no limits to our commitment to the euro. We are determined to use the full potential of our tools, within our mandate.”

On June 4, the ECB announced the decision to increase the €750 billion envelope for the PEPP by €600 billion to a total of €1350 billion.

The Federal Reserve (the US central bank) and the US government have also supported the economy. On March 27, President Trump signed into law H.R.748, the Coronavirus Aid, Relief, and Economic Security Act.

Jerome Powell, Chair of the Board of Governors of the Federal Reserve System, noted in his speech at the Peterson Institute for International Economics on May 13, that “To date, Congress has provided roughly $2.9 trillion in fiscal support for households, businesses, health-care providers, and state and local governments - about 14 per cent of gross domestic product.

“While the coronavirus economic shock appears to be the largest on record, the fiscal response has also been the fastest and largest response for any post-war downturn.”

New Zealand's GDP fell by 1.6 percent in the March quarter, the first time it recorded negative quarterly growth rate since the last quarter of 2010, when it contracted by 0.5 percent.

New Zealand has been acting to support businesses and protect jobs since March 17, when the the Government announced an initial $12.1 billion Covid-19 Economic Response Package to protect the health and wellbeing of Kiwis.

Fast forward to August 17, when Minister of Finance Grant Robertson announced a third round of wage subsidies expected to cost about $510 million and cover 470,000 jobs.

As time goes on, more support will be needed for Auckland and for the entire country, especially for the most economically vulnerable.

It is very likely New Zealand will record another negative growth in the June quarter of 2020, but economists will have to wait until GDP results are released in September to find out.

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