There was quite a bit of media coverage this morning around the potential economic impact of, and possible policy responses to, the coronavirus. There have been commentaries from, or interviews with, various economists and a fairly substantive interview on RNZ with Grant Robertson, the Minister of Finance. Each of them left me a little concerned, but of course the comments from the Minister of Finance – who gets to decide things and is backed by phalanxes of official – matter the most.
In his comments at the post-Cabinet press conference on Monday, the Minister indicated that he and his officials were working with three distinct scenarios. There doesn’t appear to be anything in writing (eg on The Treasury’s website) but broadly the scenarios were as follows:
- something (probably not too different than the Reserve Bank’s quite-sanguine recent published forecasts) that seems wholly focused on China, and with things beginning to get back to normal next month,
- something where the effects, perhaps around a wider range of countries, linger for the rest of the year, and
- a third scenario which he characterised as a serious global recession.
The government is still working with the first of those scenarios, although the Minister acknowledged that the risks of the second scenario looked to be rising.
Many of the other commentators seemed to be thinking along similar lines. The NZIER, for example, released their quarterly forecasts overnight and their press release says
It is early days and there is a large degree of uncertainty over the magnitude and duration of the effects from the coronavirus outbreak. In the short-term, the uncertainty revolves around the ability of exporters to redirect their exports to other markets. Over the longer-term, the uncertainty is whether the coronavirus has any persistent negative effects on global growth.
And I’ve seen/heard other economists commenting on whether or not GDP growth for the first couple of quarters might or might not be negative (the popular definition of a recession – more demanding here than in most countries, given our fairly rapid population rate).
But, frankly, it all seems a bit pointless, especially the very short-term forecasting, because all of them – including the Minister of Finance – seem to be dealing with a scenarios in which coronavirus is someone else’s health (and attendant domestic disruption) problem, for which New Zealand is only exposed to the global growth backwash. Of course, that backwash might well be quite severe. But none of them seem to be grappling with the near-certainty that coronavirus will soon be confirmed in New Zealand (based on what we’ve seen abroad, there must be a reasonable chance it is already here – and the Ministry of Health tell us that under their narrow criteria only 120 tests have taken place here). And, more specifically, none of them is grappling with the possibility that we – like any city in the world, it appears – could have Korean, Iranian, Italian, Bahrain situations here at any time from today (none of those countries seem to have thought last week that they’d be imposing all the the restrictions they now have). If the experts who tell us there is now a high chance of a general global outbreak, perhaps infecting 40 to 70 per cent of the world’s population, are correct, probably most cities will face such a scenario. And those sorts of events have the potential for huge disruption, and economic cost, which would swamp the sorts of narrow effects forecasters like the Reserve Bank have already allowed for.
Take as a scenario a significant outbreak in Canterbury (or Wellington). Canterbury accounts for about 12.5 per cent of New Zealand’s GDP, and suppose that for a month economic activity in Canterbury is reduced to 50 per cent of normal (some mixture of schools and daycare centres etc being closed, lots of people being sick or self-isolating because a family member was sick, restrictions on public gatherings, the evaporation of tourist arrivals, and fear). If that was the only effect New Zealand’s GDP for the quarter of the outbreak would fall by 2.1 per cent – not annualised, an actual fall of that amount. That alone would be almost as bad as the worst quarter of our worst recession in modern times in 1991. You could triple the effect if the outbreak was in Auckland (38 per cent of national GDP).
And even if by some chance the outbreak – and tough restrictions – was contained to a single city/region, the economic effects won’t be – partly about domestic supply chains, partly about transport networks, and lot about precautions and fear. If there is a Korean or Lombardy style outbreak in Sydney or Brisbane, we’ll already see a lot of costs start to rise rapidly here – both domestic fear, and how many foreign tourists do we suppose would still be coming here? So we can’t even assume that even if an individual city’s outbreak takes just a month to work through, that the national effects would be limited to a single month. It isn’t inconceivable that we – or small/compact countries like us – could see the level of GDP fall by 10 per cent or more in a single quarter, and then take quite a long time to recover from the shock of what the society has just gone through. Quite apart from anything else, that is quite a lot of lost tax revenue, even if 12-18 months hence things were more or less back to normal.
Of course, no one doing quarterly forecasts can allow for these sorts of events in their specific numbers, because we have absolutely no idea whether these scenarios hit tomorrow, next month, June (or, indeed, not at all). But anyone – policymaker, business, or householld – thinking about the outlook for the next year would be pretty unwise not to explicitly factor in a fairly probability that exactly that sort of highly disruptive short-term scenario could occur. And then you have to factor in the near-certainty (so to speak) of extreme uncertainty, and associated disruptions – forced on individuals or firms, or self-chosen as a precaution – across the world for much of the year ahead. At very least, a lot of travel just won’t happen, a lot of investment projects will go on hold, and cash-flow/liquidity is likely to be a big issue for many firms and households, whether or not banks are more or less as supportive (or otherwise) in other stress periods. Whether that will amount to the Minister’s “serious global recession” scenario or not, who knows (but probably, given other underlying vulnerabilities).
In many ways, GDP is just a headline number in thinking about the challenges we face, and in time it is likely to recover more or less fully (even allowing for the limits of monetary policy). Much the bigger issue in the disruption to lives – even lives lost – lost jobs, debt defaults, perhaps stranded sick tourists, overwhelmed health systems, disrupted supply chains for things as (normally) mundane as food. I suspect policymakers shouldn’t be focused so much on the Minister of Finance’s scenarios – which in many respects from a New Zealand perspective are fairly vanilla as regards policy responses – as on handling, and preparing for, the extreme but short-term disruption of actual coronavirus outbreaks here.
(As a reminder here of my post last week with some speculative thoughts on the potential economic ramifications if things go really bad.)
Of course, “preparing for” here should include preparing the public. So far, both officials and ministers have been almost totally silent on that count. In the early days, Health officials seem to be more interested in minimising the issue, but even having got beyond that they and their political masters seem to think all these issues are really just matters of bureaucrats, not for the public themselves. News coverage seems more interested in what the government might or might not do to help currently-affected industries, and media representatives don’t seem to be pursuing ministers on how they will handle (the likelihood of) a significant outbreak here. There was not a single question along those lines at the PM’s press conference on Monday.
There is, of course, a pandemic plan on the Ministry of Health’s website. It was last updated in 2017, under a previous government. It was designed with influenza in mind, and the current virus appears to be different in some material ways. There is even an explicit appendix (p155f) on “public information management”, including for use at a stage when a pandemic might be looming. But almost none of the messages mentioned there seem to be being conveyed at present. There is no evident leadership – from the Prime Minister, the Minister of Health, or some other minister leading the government’s response – and no sense of what choices the government might make under what conditions.
As just one example, what approach does the government intend to take around schools and daycare centres? Some places have closed them pretty quickly – Hong Kong just extended school closures until April – while other places (notably Singapore) have left them open. That single choice has big implications for many parents, and for their employers, and yet we’ve heard nothing, meaning no one can plan with reliable information.
Or at a more-mundane level, is there any sign of advice to people to consider stocking up on various non-perishables that might better enable them to cope with a few weeks at home. Probably many of those paying attention will already be doing so (I certainly am) but a lot of people are probably barely conscious of the issue – which could be on us tomorrow, or months away. And what thought has the government given to people without the financial capacity to do much about stocking up – living from pay cheque to pay cheque – including if we were to see the sorts of runs on supermarkets you can see photos of from Milan. If cities are more or less closed down, foodbanks aren’t likely to be available/effective either. And what are the plans if 10 per cent of the population needed fairly serious medical treatment over a matter of a few weeks? What plans might community support groups be making now? Is it wise, or humane, to look at encouraging more young foreigners in now, when we might soon face serious stresses on our own health systems, with the visitors having few/no domestic support networks? And so on.
There are lots of these sorts of questions/issues. Eric Crampton had a useful post on the point with some more of the relevant questions set out. Perhaps there is some really effective planning going on behind the scenes, but even if so that simply isn’t good enough in the face of this sort of event, especially when we can all see and read about what is going on elsewhere and the advice being given elsewhere. How much better to have some visible leadership and open serious conversations about how, as a society, we manage the high likelihood of extremely disruptive, costly, perhaps deadly, events quite soon.