Common global shock but diverging economic outcomes - RBNZ
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Common global shock but diverging economic outcomes

July 27, 2020

As New Zealand’s Reserve Bank we hear directly ‘from the horse’s mouth’ what our global colleagues are experiencing and doing.

From our most recent interactions it is clear that the common and (almost) simultaneous COVID-19 health shock is impacting nations in similar ways, but the policy reactions and outlooks ahead vary greatly. The differences are in large part explained by the initial health of their economy, the underlying drivers of economic activity, and the degree of success in containing COVID-19.

Reserve Bank of New Zealand Governor Adrian Orr
Reserve Bank of New Zealand Governor Adrian Orr

The more robust an economy was when first impacted by the pandemic, the more options and flexibility its local policymakers had to respond. Robust is generally considered as recent economic growth, low unemployment, low and stable inflation, an efficient financial system with sound financial institutions, and an ability and willingness to adjust government spending, investment, and welfare payments.

Amongst this ‘robust’ group, the initial policy actions have been very similar. They generally included: ensuring credit and cash is cheap and accessible, increased government spending and investment, support for employers to pay wages and access credit, and additional welfare payments.

However, the economic impact has varied significantly, especially across sectors of each economy. The more reliant a nation is on primary production (especially food export revenue) and the manufacture of durable goods (especially e-technology), the better it has fared. By contrast, the more reliant a nation is on the provision of face-to-face services (e.g., tourism and hospitality) the bigger their fall.

Common for all nations is that uncertainty and economic confidence is highly-related to perceptions that the pandemic is regionally ‘contained’. The common view amongst our international colleagues is that their local economy cannot perform at capacity with the pandemic. In general, household spending and business investment continues to lag behind incomes and earnings. This highlights one limitation of easy monetary conditions in expanding demand.

Looking ahead, accurate prediction is impossible, but preparedness is necessary and feasible. The type of scenarios policymakers are mulling include: options for when/if a vaccine is developed; the establishment of COVID-19 ‘safe’ trade and travel bubbles; and the management of rolling waves of regionally-contained COVID-19 outbreaks.

Globally, the general conclusions are that economic activity needs ongoing support by both government and central banks, and that government fiscal policy is the most potent. There is also much awareness that fiscal policy cannot subsidise everyone forever. Examples of more targeted government interventions – such as sustainable infrastructure initiatives, and retraining and people mobility are being shared. These policies are more complex to create and implement, especially at pace and scale.

Financial stability is also a key focus. The current broad consensus is that banks must be focused on the long-term interests of their customers, which will take strong regional bank leadership. The financial markets’ tools for measuring risk and allocating money must also be switched on and working, to best assist the reallocation of economic effort. The current big change drivers are more local-regional trade, simpler supply chains, and the rapid adoption of technology to deliver services.

New Zealand had a robust economic starting point at the onset of the pandemic. We have a backbone of primary production and exports. And, for now, a credible containment of the COVID-19 virus. But, we also have significant reliance on services that require face-to-face interaction. We need to be prepared for multiple health and economic scenarios so as to best manage through the pandemic and arrive at a more sustainable economic place. Mahi tahi – work together.

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