Latest coronavirus not the end of the world as we know it

Newspaper headlines driving panic buying in Auckland supermarkets suggest either we are facing an existential threat or, more likely, a small percentage of the population is behaving like idiots, presumably stocking up large in case one Covid-19 case so far means they will have to self-isolate.

 

Apart from that the immediate effects of the virus are most obviously being felt by tourist centres, tourism operators and airlines, the education sector, exporters, transport operators and shipping companies. Close behind these will be importers from China because of the extended manufacturing closedown and slow return to work. The impact is global and critical shortages will start to show up in all sorts of unexpected places, although it may only be short lived, if the trend of new cases in China continues to decline.

 

The most difficult issue is the decision to impose or extend travel bans by individual governments, such as the restriction on Chinese visitors flying to Australia and New Zealand. There is a stark choice between offending trading partners, particularly one as important as China, and taking a risk with domestic public health. When it involves a calculation of the relative balance between them, a government will err on the side of caution with public health, especially in an election year, and keep fingers crossed trading partners will understand the dilemma.

 

Addressing a business audience at Finance 2020, Finance Minister Grant Robertson outlined three possible scenarios which could play out, as presented by a Treasury led advisory group for the government’s assessment: a short, sharp shock to the economy before exports return to normal in the second half of 2020, a more prolonged shock stretching out for the rest of this year, and a global downturn or recession in the event of a world pandemic which would last much longer.

 

Each scenario will demand a different and progressively stronger government response ranging from targeted assistance to those industries most affected such as seafood, forestry and tourism through to immediate fiscal stimulus to support businesses and the economy as a whole. Robertson’s speech made it clear, while public health is the government’s most important concern, the impact on the economy is also front of mind and the government’s books are strong enough to provide support through targeted investment.

 

A cynical response would suggest the provincial growth fund and the government’s recently announced infrastructure spending package are already great examples of targeted investment and further promises would come perilously close to an election bribe. The government’s challenge is to identify those businesses and industries in need of support and design packages which will be seen as fair, particularly by those that don’t qualify. It is also important not to establish forms of relief which can be turned off when no longer needed.

 

There is general agreement among economists, other than Don Brash, on the inadequacy of Reserve Bank intervention to lower an already historically low cash rate, saying it is the government’s responsibility to do the heavy lifting in these circumstances. Infrastructure spending won’t have any noticeable effect in the short term because of the lead time required to get new projects up and running. So the preferred options are limited to direct business assistance and individual tax breaks or welfare payments, with these last two certain to prove expensive and difficult to remove.

 

Assistance to the already embattled agricultural sector will probably take a similar form to drought relief payments which seem to me to be usually too little too late. For exporters the most positive by-product of the virus outbreak has been a steady fall in the exchange rate, now down to about US$0.62, 48.5p and Euro 0.565, a more than 5% drop in the last month.

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