Principles of Economics

Executive Summary of The Great Lockdown Macroeconomic Impact

The world has never in decades have ever faced this kind of scenario where all most all the economies will suddenly suffer such a hit, which was never predicted by and economist or astrologer. This is report will address the impact of the unprecedented crisis of COVID 19 Pandemic in the economics of New Zealand. It will be explain the impact with the models like AS-AD model. Report will list down the reforms and other measures taken by the New Zealand Government to revive the economies slow down.

Table of content

Executive Summary

The Economy Before Pandemic

The Impacts of the COVID-19 Shocks

The policy Response

Beyond the Pandemic

References

The Economy Before the Pandemic

The open economy of New Zealand is based on the principles of free market. The service and manufacturing sectors of the country support the very productive agricultural industry of New Zealand. Goods and services exports constitute nearly one-third of the country's GDP. The treasury offers strategic guidance on the present and future economy of the country being the Government's leading financial and economic advisor. The task of the treasury is to assist New Zealanders in achieving higher living standards (The Treasury, 2020).

Overall Situation before the Pandemic:

Before the pandemic, New Zealand had been enjoying strong economic indicators. The political, social, and economic stability of the country had been the key to increased foreign investments and GDP growth. Between 2000 and 2007, the economy of the country was expanding by almost 3.5% each year. Even the 2008/09 economic recession which hit many developed countries had a comparatively small impact on New Zealand’s economy. However, the percentage of annual growth in New Zealand decreased to 2.1% after the recession (New Zealand Now, 2020).

Economic Indicators in 2019:

The financial year just before the pandemic had shown the continuation of positive economic growth for New Zealand. According to Stats NZ (2019), the economy of the country grew 0.5 percent on a quarterly basis and hit the figure of $300 billion for the first time in history. Primary industries also grew by 0.7% within the country and the same goes for the services sector which also grew by 0.7%. As for household spending, it saw a rise of 0.5%, whereas it grew by 0.4% in the previous quarter. The economic activity grew by 0.2% as compared to the previous financial year. The GDP of the country reached the figure of 2.4% at the end of the 2019 financial year. All of this contributed to the purchasing power that increased by 0.8% in 2019. However, the investment spending and exports of services and goods for the country dropped in 2019 by 1% and 1.8% respectively (Stats NZ, 2019). The rate of inflation had been 1.62% for the country in 2019 and had remained almost in the same range since 2017 (Statista, 2020).

As for the rate of unemployment in New Zealand is concerned, it experienced a consecutive decrease since 2015 and reached from 5.4% in 2015 to 4/1% in 2019. The decrease occurred in the second quarter of 2019. The reading was slightly below the market estimate of 5.8 percent unemployment indicating a decrease in the number of people searching for jobs (Focus Economics, 2020). It is due to the increase in foreign direct investment that led to creating multiple job opportunities for the people of New Zealand. According to the Stats NZ (2019), the foreign direct investment (FDI) value in New Zealand grew up to $113.0 billion at the end of March 2019. In short, the economy of the New Zealand was stable in the year preceding the pandemic and had remained on the positive side for many years.

The Impacts of the COVID-19 Shocks

As per one of the News reports, New Zealand is facing deepest recession of decades, after which the strict measures were imposed due to Covid-19 pandemic which are widely praised. Its GDP shrank by 12.2% between April 2020 to June 2020 due to lockdown and border closures hit. It is New Zealand's first time recession since the last global financial crisis since 1987, (BBC NEWS, 2020).

The New Zeland entered into a strict seven-week lockdown on March 24’20 (AFP,Economic Times, 2020)

 AD-AS Model – COVID-19 Pandemic has not hit demand side by supply side as well, (Melson, 2020) Sudden economic stops result in demand evaporating as consumers batten down the hatches and many more are laid off, as well as supply destruction. All the jobs cannot be performed at home in either the manufacturing or services sector /industries, which has resulted destruction in supply as well. So, there is push from the sides the GDP will surely move downwards as shown in the figure 1 below:-

In the above figure it can be seen that demand curve shifts down to the right and at the same time supply curve shifts up and also to the left. This scenario, is that the economy end up with a significant drop in GDP. But here the impact of prices majorly depends on how these shocks move in relation to each other.

Neo Classical Method of economic growth also helps to establish similar results as suggested in one of research done by (Universidade Federal de Vi¸cosa, 2020) , it was seen that there is strong relationship between the factors of the economy like labour, unemployment, consumer demand and production level and utility factors with the help of different equations

Impacts of the COVID-19 Shocks in New Zealand

New Zealand's coronavirus lockdown, with all non-essential businesses shut, will hurt the economy more than the GFC, the finance minister warned. They are discussed below.

(Reserve Bank of Newzeland, 2020), has shown and suggested impact of COVID as the alert level for GDP of the economy and divided at 4 levels

TABLE 1:

Alert Level

GDP reduction %

1

3.8

2

8.8

3

19

4

37

Explanation:

New Zealand's financial minister has warned the country is struggling with an economic shock "a quantum greater" than that of in the 2008 world-wide financial problem, with jobless numbers very likely to meet or exceed all those at time on the down.

"GDP will have a major hit, and also unemployment as Robertson told in a parliamentary committee established to scrutinize his government’s measures on the Covid 19 pandemic on Wednesday. He added that he couldn't but give specific forecasts for one or the other measure that he stated had been being finalized as a measure to deal by the Treasury.

New Zealand is almost 7 days into a national lockdown which has seen all non-essential businesses shut and nearly every New Zealander ordered to stay static in their homes unless they're buying groceries or perhaps seeking medical help. The lockdown is likely to last one month.

As per the (Stats NZ, 2020), In Jun'20 quarter, unemployment rate of seasonally adjusted fell to 4.0 %, down from 4.2 % last quarter, while underutilization rose. In the June 20 quarter:

  • Rate of unemployment might go down to 4.0 %
  • Rate of underutilisation will rise to 12%
  • hours worked will also go down by 10.3%
  • Number of people who are not in the labour force increases to 37,000
  • Number of people who are employed people fell by 11,000
  • Wage subsidy scheme is in place from 17 March’20.

“Underutilization - a broader way of measuring extra capability within the labour sector - and hours worked supply a far more comprehensive image of New Zealand's work industry than the unemployment rate by itself. This quarter, underutilization rose from 10.4 % to 12.0 % - the biggest quarterly rise since the sequence started, while hours worked had been down by more than ten % - a third record," work industry and home statistics senior supervisor Sean Broughton believed.

Slight Fall in Work and Jobs

The employment rate fell to 66.9 % in the June'20 quarter, down from 67.5 % last quarter. This reflected a fall in the total number of individuals employed by approx 11000 along with a rise in the working age public (up 20,000).

The fall in the amount of individuals in employment as well as unemployment this quarter led to the labour force participation fee falling to 69.7 %, down from 70.5 % (revised) previous quarter.

The amount of individuals not in the labour pressure rose (up 37,000) this quarter, while the amount of individuals in the labour pressure fell (down 17,000). This was the biggest fall in the amount of individuals in the labour force captured after the global economic crisis.

Industry wise slowdown in the economy as per Reserve Bank of New Zealand, as per alert of different level :-

Reshoring New Zealand Manufacturing

Manufacturing division of New Zealand has grown slower as compared to the general economic climate in the last 10 years. Many companies have offshored producing capability, wanting to gain from lower operating expenses in countries like China. Nevertheless, reshoring is anticipated to be more and more common over another 5 years, as firms re-evaluate the danger of being dependent on overseas suppliers. New Zealand’s Manufacturing sector, that had been worth $29.6 billion or perhaps 11.2 % of the overall national GDP in 2017 18, is projected to gain from this particular trend. (IBISWorld, 2020)

New Zealand could reduce the exposure of its to provide shocks in international economies by propping up household production of essential goods, like those created by the Medical, Scientific and surgical Equipment Manufacturing industry. This particular industry’s capacity has turned into a specific thing of contention, as nations around the world experienced serious shortages of medical supplies including face masks, because of foreign supply disruptions.

COVID-19 vs GFC/Brexit

(Mahmood, 2020)The initial cost of Brexit will be a significant slowdown of the UK economy with the strong possibility of a recession which now has become a certainty with the Covid-19 outbreak.

Covid-19 pandemic has seen many governments around the world being forced to think on their feet instead of implementing detailed and well-rehearsed plans. This's notwithstanding the reality that a pandemic was certain to happen, sooner or perhaps later (and will occur again). The usefulness of national replies has varied tremendously. Globally, New Zealand is regarded as establishing the gold standard in' curve crushing', and also for a quick time achieved Covid free status. For this particular accomplishment, much credit is because of the New Zealand authorities, particularly to Prime Minister, Jacinda Ardern. Nevertheless, post lockdown the brand New Zealand government has encountered a selection of Covid policy implementation troubles (many of which might have been anticipated). Nevertheless, Covid 19 may continue to come out to were a shock to pre-existing policy procedures and policy frames like austerity. In that case, you will find justification for hope that in the long term, voters and governments may be much less short term in their outlook..

The Policy Responses

The Treasury is leading function across authorities on New Zealand's financial reaction to COVID 19, to:

  • Cushion the economic blow to whanau as well as families, employees, communities and businesses from the impacts of COVID-19
  • Position New Zealand for healing, and
  • Reset and rebuild the economy of ours.

Our advice has backed the Government to set in place an extensive range of initiatives. While it's been crucial that you move rapidly to restrict the financial damage of COVID 19, we're also working to determine the usefulness of the spending and inform choices about any additional steps which could be necessary.

The Treasury is taking a longer term perspective, supplying ongoing suggest on the Government about the way the changing global situation could affect New Zealand's financial resilience and also the intergenerational health of New Zealanders, as well as the choices for restoration.

Overview of methods announced

In September 2020, changes had taken effect relating to who's qualified for the Leave Support Scheme and also the duration of payments.

Whereas in August the Government announced an innovative two week wage subsidy offered to companies that experienced a forty % revenue drop across a 14 day period between twelve August and ten September when set alongside a comparable period last year. Uses for the COVID 19 wage subsidies have now shut. In case you've staff that meet specific health criteria and cannot work due to COVID 19, you might be ready to apply for the COVID 19 Leave Support Scheme.

Post-Budget 2020- After Budget 2020, $20.2 billion stayed in the CRRF fund. Investments made since then include:

Extension of the Wage Subsidy Scheme and also the COVID Income Relief Payment for all those who lost the income of theirs as an outcome of the pandemic Extension on the Small business Cash flow Scheme, and Additional financial support for personal protective gear for overall health providers.

Additional support for ongoing wellness, economic response measures and border has happened, and expenditure of $760 million to assist councils update their 3 layer infrastructure.

As at 20th July, $14 billion remained inside the COVID Response and also Recovery Fund, which is currently being put aside in the event which, for instance, New Zealand experiences a next trend of the pandemic.

Fiscal Policy

As per (International Monetary Fund, 2020), and (summary-initiatives/summary-initiatives-crrf-budget2020, 2020), New Zealand has also introduced the foundation system for COVID relief and CRRF(Covid-19 Response and Recovery Fund), on eleven May 2020, The financial implications of a few new measures are handled against the CRRF during April as well as early May. In May 2020, the Government had declared a $ 29.8 billion of the CRRF, out of which $13.9 billion was announced before Budget Day included in a continuing response to COVID 19, making $20.2 billion of financial backing around. Several of the highlights of this particular bundle are, The government has announced financial steps amounting to a total of NZ $58.5 billion (19.5 % of GDP) through FY 2023 24. The entire amount consists of the COVID 19 Response and also Recovery Fund, of what NZ $14.1 billion happen to be put aside as contingency for a possible next wave. Announced financial steps include: (i) healthcare related investing to strengthen capability (NZ1dolar1 0.8 billion or maybe 0.3 % of GDP); (ii) a permanent expansion in societal spending to guard people that are vulnerable (total NZ $ 2.4 billion or maybe 0.8 % of GDP); (iii) a wage subsidy to help employers seriously impacted by the effect of COVID 19 (NZ1dolar1 14.8 billion or maybe 4.9 % of GDP); (iv) cash flow alleviation payments to help individuals who lost the jobs of theirs (NZ1dolar1 0.6 billion or maybe 0.2 % of GDP); (v) a lasting change in business taxes to help you money flow (NZ1dolar1 2.8 billion or maybe 0.9 % of GDP); (vi) infrastructure investment (NZ1dolar1 3.8 billion or maybe 1.3 % of GDP); (vii) transport tasks (NZ $0.6 billion or maybe 0.2 % of GDP); (viii) a short-term tax loss carry back system (NZ $3.1 billion or maybe 1.0 % of GDP); (ix) assistance of the aviation market (NZ1dolar1 0.6 billion or maybe 0.2 % of GDP); (x) a tourism healing program ($0.4 billion or maybe 0.1 % of GDP); (xi) a government real estate plan (NZ $0.7 billion or maybe 0.2 % of GDP); and (xii) schooling infrastructure enhancements (NZ $ 0.2 billion or maybe 0.1 % of GDP).

Monetary and Macro-Financial

The Reserve Bank of New Zealand (RBNZ) maintained the recognized funds pace (OCR) at 0.25 % on 23rd September , the same since the OCR was decreased by seventy five basis points on March seventeen. In August, to additional ease financial policy, the RBNZ broadened the Large Scale Asset Purchase method (LSAP) to buy Local Government and government bonds Funding Agency (LGFA) within the secondary market from as much as NZ1dolar1 sixty billion for twelve weeks to a maximum of NZ1dolar1 hundred billion by June 2022. Additionally, it announced that a bundle of extra monetary instruments will stay in active planning for a possible demand for more monetary stimulus, based on the outlook for employment and inflation. The program of extra tools has a damaging OCR backed by a Funding for Lending Program (funding list banks right at near OCR) as well as buying of international assets.

Beyond the Pandemic

After the pandemic overs every country and every human has lot of hopes that there will be fast recovery of not only the economy but a normal human life as well. There is 360 degree change in the way the human being live in the society, mask and social distancing has created a big gap in overall social life. Students in many countries still don’t go the schools, they don’t go the park to play. Education and learning methods and ways have completely changed. Every activity movement is being watched and taken with lot of cautiousness.

Beyond the pandemic one thing which will change is the way human use to think about the nature and its value. As a human everyone had forgotten to behave nicely to other and to our Mother Nature and earth. At least people have started realising the value of freedom and wants to go back to their roots to be connected and be healthy so that these type of situation can be avoided. Everyone was busy in their life and work, that anyone hardly time to think about their own being and surrounding. This pandemic will surely change the whole world, in spite of social distancing people have come together many times during this period to recognize the humanity and selflessness of the others.

Economies will revive but surely the impact of COVID 19 pandemic will be felt for many many decades may be in the coming times. It has also made human being realize their power to enjoy and live with the limited resources and how to utilize it to is optimum when nothing is available.

References for The Great Lockdown Macroeconomic Impact

AFP,Economic Times. (2020, June). New Zealand takes biggest economic hit in 29 years. Retrieved from https://economictimes.indiatimes.com/: https://economictimes.indiatimes.com/news/international/business/new-zealand-takes-biggest-economic-hit-in-29-years/articleshow/76436989.cms

BBC NEWS. (2020, September). Covid pushes New Zealand into worst recession in years. Retrieved from https://www.bbc.com/news/business-54186359#:~:text=New%20Zealand%20is%20in%20its,lockdown%20and%20border%20closures%20hit.&text=But%20the%20government%20hopes%20its,lead%20to%20a%20quick%20recovery

https://www.treasury.govt.nz/system/files/2020-05/b20-sum-initiatives-crrf.pdf. (2020). Retrieved from https://www.treasury.govt.nz/system/files/2020-05/b20-sum-initiatives-crrf.pdf: https://www.treasury.govt.nz/system/files/2020-05/b20-sum-initiatives-crrf.pdf

IBISWorld. (2020). short-supply-covid-19-implications-for-new-zealand-supply-chains. Retrieved from https://www.ibisworld.com/industry-insider/coronavirus-insights: https://www.ibisworld.com/industry-insider/coronavirus-insights/short-supply-covid-19-implications-for-new-zealand-supply-chains/

International Monetary Fund. (2020). Policy-Responses-to-COVID-19. Retrieved from https://www.imf.org: https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19

Mahmood, M. (2020, May). Covid-19 and trade after Brexit. Retrieved from https://thefinancialexpress.com.bd/views/covid-19-and-trade-after-brexit-moving-into-uncharted-waters-1589642711

Melson, G. (2020, April). Coronavirus and Inflation: Pricing the Pandemic. Retrieved from https://www.im.natixis.com: https://www.im.natixis.com/en-hk/markets/inflation-covid-19-april-2020

Reserve Bank of Newzeland. (2020, May). Economic impacts of COVID-19. Retrieved from https://www.rbnz.govt.nz: https://www.rbnz.govt.nz/-/media/reservebank/files/publications/analytical%20notes/2020/an2020-04.pdf

Stats NZ. (2020, August). covid-19-lockdown-has-widespread-effects-on-labour-market. Retrieved from https://www.stats.govt.nz: https://www.stats.govt.nz/news/covid-19-lockdown-has-widespread-effects-on-labour-market

summary-intiatives/summary-initiatives-crrf-budget2020. (2020). Retrieved from https://www.treasury.govt.nz: https://www.treasury.govt.nz/publications/summary-intiatives/summary-initiatives-crrf-budget2020

Universidade Federal de Vi¸cosa. (2020, June ). COVID-19 and Global Economic Growth: Policy. Retrieved from https://arxiv.org: https://arxiv.org/pdf/2005.13722.pdf

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