Question: The covid-19 economy is both a long-term and a short-term story. First, how do you see the short term?
Paul Conway: In the short term, the pandemic has created a “shortage economy”. Governments across the OECD have thrown the fiscal kitchen sink at their economies to try and offset the impacts of covid.
Collectively, governments have spent around US$10 trillion to keep people in jobs and maintain incomes and spending. That’s a one followed by 13 zeros. Put another way: for every dollar of reduced output due to the pandemic, governments across the OECD have pushed back with 90 cents of fiscal stimulus.
This is a very different fiscal response compared to the Global Financial Crises in 2008/09 when austerity was the name of the game.
Central banks have also been doing their bit, with low interest rates and huge bond buying programmes.
We are living through a period of massive global stimulus and demand for goods has been incredibly strong as a result.
Running alongside this demand surge, the supply side in many economies has been under pressure. Global migration has slumped, and workers have been slow to move out of parts of the services sector hit hard by the pandemic. Labour is getting increasingly difficult to find and more expensive.
Global supply chains – which have suffered from weak investment over recent decades – are stretched to breaking point.
A big positive demand shock plus issues on the supply side equals inflation. In New Zealand, inflation is running at around 4.9%. In the United States, inflation is the highest it’s been in 30 years – 6.2%. And inflation is well above central bank target bands in plenty of other economies, too.
The big question is whether these inflation pressures are going to persist into the future or naturally subside as demand pressures moderate and supply chains heal. Some central banks – including the RBNZ – have started lifting interest rates. Others are keeping their powder dry but increasingly talking about winding down monetary stimulus.
Question: How have these big trends been playing out in NZ?
Paul Conway: Since covid hit early 2020, our economy has been surprisingly strong. The wage subsidy and other government support kept many businesses operating and people in work.
Extremely low interest rates pushed up house prices, generating a ‘wealth effect’ that gave some Kiwis the confidence to keep spending.
With our border closed, migration dropped away to almost nothing and the labour market has been tight as a drum. Unemployment is currently 3.4%, which is crazy low in the circumstances.
We have had a great run so far but should not be lulled into a false sense of security. This pandemic is having massive impacts, and, in many ways, we are just getting started in adjusting to the shock.
Question: How do you think the economy will look as we move on from covid-19?
Paul Conway: Even before covid, the global economy was slowly but surely moving into a new phase. We’re coming out of a 30-year period that economists call the Great Moderation, the defining feature of which was constant economic expansion with low inflation.
There are several ‘big-picture’ reasons for the Great Moderation. First, global demographics were very favourable, swelling the labour supply in many countries. Because workers produce more than they consume, this generated deflationary pressures globally.
Second, globalisation increased strongly – improving economic efficiency across the globe – and China and India integrated themselves into the global labour market. Again, these huge positive supply shocks worked to grow productive capacity while keeping inflation in check.
Irrespective of covid, the Great Moderation was already coming to its natural end. Over the last ten years or so, global demographics have been moving in the other direction, with baby boomers beginning to retire and populations aging.
Globalisation has also stalled. Trading arrangements across some countries are now more about geopolitics rather than economic efficiency (not New Zealand, thankfully) and economic nationalism has increased.
On top of all that, responding to climate change – which is vital, urgent work – is not an easy transition. We are already seeing turbulence in energy markets in many parts of the world, for example.
In time, the green economy will deliver plenty of interesting well-paid jobs, not to mention safeguarding the planet and the future of humanity. But making the necessary changes to get there is hard disruptive work.
Question: What should NZ businesses do in the face of all these factors?
Paul Conway: We are at an incredibly important moment in our economic history. The world is fundamentally changing, and we need to evolve our economy along with it.
Rapid population growth and ever-increasing house prices have driven economic growth in New Zealand but will not continue. The Government has signalled a policy reset on migration. And with improvements in regulation, higher interest rates, slower population growth, and a building surge, house prices are likely to fall a bit.
Covid is raising many questions about our economic future. Tourism will revive to some extent when the pandemic subsides. But will people still want to jump on a plane for 30 hours to come see us? Will Kiwis still want to commute into city centres to work and shop with covid endemic in the community? And what does the rise of the “conscious consumer” globally mean for our agricultural sector?
As if that wasn’t enough to contend with, workers will keep getting harder to find and more expensive to hire. Higher wages will, thankfully, reduce inequality in many countries including New Zealand.
How New Zealand businesses respond to all this will depend on their specific circumstances. But growing Kiwi businesses is going to get a lot more complex than simply throwing low-cost labour at them. Instead, investment and technology adoption need to become more central to growth.
Question: What are the opportunities around investment and technology adoption?
Paul Conway: The digital opportunity sitting in front of New Zealand is a whole separate interview!
In short, our economy is not especially productive because of our ‘economic geography’. Because we are a small economy a long way from global markets, many Kiwi businesses do not benefit from scale and selling into large markets.
Fortunately, digital tools allow Kiwi businesses to expand their markets and take remoteness out of the equation. As demonstrated over lockdown, by being open for business 24/7/365, online businesses are also more resilient in a covid world.
But digital adoption does not simply happen by osmosis. Businesses need the right skills and resources at their disposal. So, there is a massive work agenda in front of policymakers and the private sector if we are to make the most of the digital opportunity.
We need something like a social movement: “Embrace technology because better productivity means higher wages, stronger investment returns, and cheaper prices.”
Question: What is the role of banks in this transition?
Paul Conway: Banks have a huge role to play in all this. In large part, it’s about getting away from an obsessive focus on quarterly profits and recognising that a thriving New Zealand economy is in everyone’s best interests.
At BNZ, we are using our strong understanding of the economy, business expertise, and networks to support our customers in seizing the digital opportunity. For example, we are a founding partner (with MBIE) of the Digital Boost Alliance, which is a group of corporates working together to lift digital adoption. As part of that, we are working with Zeald to build digitally enabled clusters of New Zealand businesses.
The next decade is going to be incredibly interesting and there has never been a better moment to build a more productive, sustainable, and inclusive Kiwi economy. Let’s get on with it.
This article is for general information only. It’s not advice (financial, legal, or otherwise) and can’t be relied upon. If you do, then no one, including BNZ, is liable for resulting losses (both direct and indirect). Any opinions may not be the same as BNZ (or anyone else). Contact BNZ or your professional advisor for help or advice specific to you.