The price for overcaution

Published in Insights, The New Zealand Initiative’s newsletter, 26 June 2020

It says a lot about this economic crisis when a forecast of -4.5% annual growth is regarded as good news.

Yet that was the forecast the International Monetary Fund released yesterday. Unfortunately, it was not for New Zealand but for Australia.

In New Zealand’s case, the IMF kept its 2020 forecast at -7.2%. That is worse than Australia and the global GDP forecast at -4.9%. At least it is better than the -10.2% predicted for the Eurozone.

The IMF’s report A Crisis Like No Other, An Uncertain Recovery shows what an economic beast this crisis is. The recession is severe, the fiscal figures are eye-watering.

However, it is not a uniform recession. Some economies are hit harder than others.

Unsurprisingly, countries with high Covid-19 case numbers and stringent lockdowns show big falls in GDP. The UK, France and Italy are in this category.

Meanwhile, countries with low numbers generally fare better. For example, both Egypt and China are forecast to actually grow their economies this year.

This makes New Zealand a special case. On the one hand, New Zealand had few cases of Covid-19 by international standards. On the other, it is still experiencing a strong economic downturn.

There are two obvious explanations for this outcome. New Zealand implemented a hard lockdown, which was much stricter than, say, in Australia. Compounding this, New Zealand’s exposure to both tourism and education exports left the country more vulnerable to Covid-19 than its peers.

Both factors help explain why Australia appears to emerge from the crisis with less damage than New Zealand.

Australia had a somewhat smaller exposure to tourism. But the Australian Government also kept a greater part of its economy operational during lockdown. Australia’s criterion for allowing economic activity was whether it was safe to do so whereas in New Zealand all “non-essential” business was simply shut down.

At least with the benefit of hindsight, one would have to conclude that Australia’s strategy resulted in a better economic outcome. “Safety” should be the decisive criterion for managing the economy in a pandemic.

If that is true, then New Zealand needs to adjust its own strategy. This would mean opening the border with appropriate measures rather than simply keeping it shut to non-residents.

New Zealand could keep its border shut regardless of whether it is possible to open it safely. But that would mean repeating the mistake it made during lockdown.

As the IMF suggests, Kiwis are already paying a high price for an unreasonably cautious policy choice.

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