With clearer water, reduced air pollution and lower CO2 levels, coronavirus-induced lockdowns may be healing our planet. However, these unprecedented measures can leave a long-lasting impact on the economies across the world.
Undoubtedly, coronavirus pandemic has left the world leaders with a Hobson’s choice: On the one hand, if COVID-19 is permitted to take its course, public health facilities will be flooded with an uncontrollable flow of patients; while on the other, economies have to pay a heavy price of measures imposed to contain the spread of the virus, like lockdowns.
Assessing the initial effect of coronavirus containment measures like shutdowns on the global economy, the OECD has warned of a sharp contraction in the GDP levels, corporate investments, household spending and international trade.
As per the OECD, the initial direct impact of the widespread shutdowns can be a fall of between one-fifth to one-quarter in the level of output in several economies. Additionally, the economic organisation expects a fall of about one-third in the consumers’ expenditure.
Below figure demonstrates the potential initial impact of widespread shutdowns assessed by the OECD on some selected advanced and emerging markets:
As seen in the chart, the OECD anticipates Ireland to be the least affected country by the COVID-19-induced shutdowns, while Greece is likely to be the worst hit by the same. It is worth noting that the organisation has anticipated an initial direct hit of 20% to 25% to GDP in several major advanced economies, like Australia, Russia, Canada, Turkey, etc.
Why is Kiwi Land Under Spotlight?
The OECD’s latest projections have put New Zealand’s economy under the spotlight, which is likely to witness an initial fall of about 30% in its GDP, comparatively higher than the dip in Ireland (~15%), Australia (~22%) and the US (~25%).
To recall, New Zealand announced a complete lockdown from 25 March 2020 (11:59 PM) to beat the transmission of deadly coronavirus across the nation. Post the lockdown, the number of coronavirus cases have appeared to decelerate in the country. However, PM Jacinda Ardern mentioned in a recent press conference that it is too early to evaluate if the lockdown measures are slowing the spread of coronavirus successfully or not.
It is worth pointing out that in comparison to other advanced economies like the US and Australia, New Zealand has fewer coronavirus-infected patients. As on 04 April 2020, New Zealand has 824 coronavirus confirmed cases, with only one reported death so far. As per the nation’s top health official, the coronavirus cases in the country are already flattening off and quite possibly have already peaked.
Policy Actions Taken Against COVID-19 in New Zealand
Initially, the New Zealand government announced a COVID-19 support package worth NZ$ 12.1 billion or 4% of the GDP; however, as the nation moved to the lockdown, some changes were made to the package, which now costs around NZ$ 16.3 billion or 5.4% of the GDP.
The government has planned to disburse over half of the total fiscal package by end-June 2020. The key measures under the package include:
- A permanent rise in social spending to safeguard vulnerable people – NZ$ 2.4 billion or 0.8% of the GDP over the next four years.
- Healthcare-associated spending to bolster capacity – NZ$ 0.5 billion or 0.2% of the GDP.
- A permanent change in business taxes to support cashflow – NZ$ 2.8 billion or 0.9% of the GDP over the next four years.
- A fixed 12-week wage subsidy to aid severely affected employers by COVID-19: NZ$ 9.3 billion or 3.1% of the GDP.
- Support for the aviation sector: NZ$ 0.6 billion or 0.2% of the GDP.
Besides these measures, the government has also approved a debt funding agreement worth NZ$ 0.9 billion Air New Zealand (NZX:AIR) to ensure persistent freight operations, national flights and limited international flights.
To support companies and businesses during the lockdown, New Zealand is also planning to introduce new legislation to aid companies facing insolvency amidst the COVID-19 pandemic. With the new legislation, the companies’ directors with considerable liquidity problems will get a safe harbour under the Companies act from insolvency.
Monetary Policy Initiatives
In addition to the NZ government’s measures, the Reserve Bank of New Zealand (RBNZ) has also announced some measures to curb the adverse economic impact of the coronavirus crisis. These actions include:
- Reducing the official cash rate to 0.25%, announcing this level to prevail for minimum 12 months.
- Declaring a Large Scale Asset Program to buy government bonds (up to NZ$ 30 billion) in the secondary market throughout a range of maturities over the next one year.
- Re-establishing an interim US dollar swap line with the US Federal Reserve.
- Providing liquidity in the foreign exchange swap market.
- Establishing a new Term Auction Facility, enabling banks to get access to collateralised loans of maximum 12 months.
- Reducing the core funding ratio requirement of the banks to 50%.
- Postponing the start date requiring higher capital for banks to July 2021.
Given widespread uncertainty in the economy, the RBNZ has recently ordered banks to halt redeeming capital notes or paying dividends.
Moreover, the retail banks, the RBNZ and the NZ government have announced a six-month loan moratorium for SMEs and mortgage holders affected by coronavirus pandemic, along with a business finance guarantee scheme worth NZ$ 6.25 billion for SME loans.
It is worth noting that the NZ government and the RBNZ have stepped up, taking every possible action to prevent an economic downturn. However, uncertainty continues to brew up with the OECD’s anticipations of a sharp fall in the GDP.