The economic shock of Covid-19: a mixed picture

2020 will enter the textbooks for the size of its global downturn.

The spread of the coronavirus across many countries prompted governments to introduce lockdown measures to contain the epidemic. These mobility restrictions and business shutdowns led to financial market turmoil, an erosion of confidence and heighted uncertainty.

These factors combine to create the worst possible mix: global negative supply shock (less production) coupled with a global negative demand shock (less investment and consumption) especially in the first quarter of 2020.

According to the most recent forecast by the International Monetary Fund (IMF) released in April 2020, the economic effects of the Covid-19 pandemic will be more severe than the 2007-08 global financial crisis.

In 2020, the GDP of New Zealand will shrink by 7.2 per cent; by comparing this figure with the +2.7 per cent for 2020 forecasted in October 2019, we obtain an economic shock equal to -9.9 per cent, one of the largest negative shocks among advanced economies (see the horizontal axis of the graph).

The magnitude of the economic shock is the result of the stringency and length of lockdown measures and of degree of economic integration of the country with other countries affected by Covid-19: the higher the international exposure of a country, the worse its probable economic effect: this is generally the case of countries whose goods and services (such as education and tourism) sold abroad, represent a relatively high share of the GDP.

Leaving behind the effects of the lockdown does not occur with a change of Alert Levels, it a lengthy process. Some factors like job losses, lower wage growth, fewer hours worked and revenue uncertainty might suppress demand and send negative signals to the market.

Moreover, as stated by the Governor of the Reserve Bank Adrian Orr ‘even if New Zealand successfully contains the spread of disease locally, reduced world activity will mean lower demand for many of New Zealand’s exports.’

Getting the economy back on track will take time and assuming that the pandemic fades in the second half of 2020, the IMF has forecast a global growth of +5.8 per cent and a +5.94 per cent for NZ in 2021.

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