Rod Oram: Two Herculean efforts to save economy
Governments have started to put money into people's hands to stimulate the economy, writes Rod Oram. Now we need to start restoring business activity and consumer spending
Over the next few months global economic activity will likely plummet more than the 15 percent it suffered during the first three years of the Great Depression.
For the record, New Zealand’s GDP plunged 17 percent from 1929 to its nadir in 1931.
Recovery from the Depression took more than a decade of innovative policy plus the demand/supply boom of a world war. One reason for the prolonged agony was a drastic shrinking in money supply - by one-third in the US, for example - which caused financial systems to atrophy and prices to deflate.
History rarely repeats itself. But it does rhyme, hopefully this time to a very different tune. Over the past week, many central banks and governments have pledged gargantuan fiscal and monetary stimulus packages. As of Thursday afternoon, they totalled some US$4.5 trillion, equivalent to some 5 percent of global GDP. But as the virus, lockdowns and economic contractions spread, that stimulus will have to at least double or treble to keep economies functioning.
The US Federal Reserve has already committed to much bigger, broader support measures for its economy and the world’s than it did during the Global Financial Crisis. Even on modest assumptions, the actions will cause its balance sheet to balloon to more than US$5 trillion, compared with a mere US$1.3 trillion during the prior crisis. It took just weeks to design and announce these measures, compared with three years of escalating actions during the GFC.
Meanwhile, the US Congress is likely to pass soon a US$2 trillion support package to give unprecedented help to people, businesses and essential services such as hospitals. It is substantially larger than the two main congressional measures, one for Wall Street and the other for the rest of the economy, during the entire GFC.
Our Government and Reserve Bank have acted just as boldly and slightly faster on fiscal, monetary and financial system measures. Even better, they’ve done so without the debilitating political and ideological fights plaguing the US.
All these measures, though, are barely the beginning. The plunge in economic activity, here and around the world, will cripple and potentially paralyse economies. Mitigating that damage requires broadly two Herculean efforts:
- First, we must deploy announced measures at lightning speed. Very large sums of money have to start flowing to people and organisations in a matter of days, and certainly no slower than a couple of weeks. If they don’t the economy, which can only function as a perpetual motion machine, will slow, wobble and tip over – just like a child’s spinning top.
- Second, we must work out how to begin restoring some demand and supply beyond the essential services now operating during lockdowns. This will be phenomenally difficulty to do while maintaining society's physical separation. Seclusion is the only way we know so far to halt the rampant spread of the Covid-19 virus, with its near-exponential rise in infected people and soon, in New Zealand, the inevitable first deaths.
Here is one measure of the urgency. Eurozone GDP will contract this year by 9.4 percent if the lockdown is one month, 18.8 percent if it's two months and 28.3 percent if it's three months, estimates, Gavekal, an Asian/European based provider of independent investment research. Note from its chart below, based on its analysis of 64 sectors in national economies, these sharp contractions will happen even when half of an economy is running at normal capacity.
China’s was the first to suffer such an economic shock in the virus crisis. In January and February, its car production fell by nearly 50 percent, retail sales by 20.5 percent, and electricity generation by 8.2 percent. Overall its GDP in those two months fell some 13 percent.
Now, Gavekal estimates, 95 percent of large companies and 60 percent of small and medium-sized enterprises outside Hubei, the first epicentre of the virus, are back to normal activity.
But just when many of them were banking on a strong export recovery, their customers abroad are now in lockdown and buying much less. Chinese exports are likely to drop by 20-45 percent in the second quarter, which would knock four to eight percentage points off GDP growth in the quarter.
Massive stimulus packages, here and elsewhere, are the right first step in addressing these unprecedented economic disruptions. But if recipients - individuals and companies - largely save the money or use it to meet financial obligations such as paying interest, the economy will only derive a little of the benefit.
Thus, it’s crucially important they use as much of the money as they can to help restore demand, and thus supply and activity in the economy. This will be exceptionally hard to do while maintaining the effectiveness of the lockdown we must have to stamp out the virus. But not impossible.
First, we must ensure people are abiding by the lockdown and that essential services such as food, medical services and utilities are delivering all we need. We must also ensure they can do so in a far longer lockdown and in far more adverse conditions, such as greater difficulties in getting essential components and inputs at home and abroad.
Second, once we’ve secured that utterly critical economic base, the Government should gradually expand its definition of essential services. Currently it is rightly a sharply restricted list. A good way to begin expanding economic activity would be to allow courier services to resume handling non-essential items. E-commerce could then play a bigger role. TradeMe’s website gives a very clear explanation how restricted the current trading system is.
But for e-commerce to function, businesses and government would also need to design protocols for warehouses and fulfilment centres to operate. Currently, we are far more restrictive than some other countries. In the US, for example, Amazon is still functioning, albeit for essential items; and in many US states restaurants have switched to doing takeaways only delivered by services such as Uber Eats.
Third, we would rapidly need protocols for non-essential manufacturers and other key links in supply chains to resume operations. By necessity, this expansion would have to be gradually phased in by activity and volume to ensure workplaces are redesigned to be strongly anti-virus.
Fourthly, as many businesses as possible across the economy should work out how they can drastically reduce human contact through online ways of working and serving customers. Huge creativity is vital. To offer just one example, gyms could substitute online aerobic and exercise sessions for their premise-based exercise machines.
These are just a few first thoughts about why we must rebuild demand and supply; how we can do so in highly innovative ways; how we can help our economy survive; and how we can evolve it rapidly into one that’s more sophisticated, more resilient and more valuable. If you’re already on to it, I’m very keen to hear from you, please, at Rod.Oram@NZ2050.com.
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