sign uplog in
Want to go ad-free? Find out how, here.

As we look towards, hopefully, a recovery for the economy, David Hargreaves is seeing a 'W'

As we look towards, hopefully, a recovery for the economy, David Hargreaves is seeing a 'W'

It was going to be a ‘V’ they said.

Then some of us got a bit gloomy, well, actually a lot gloomy, and started talking about an ‘L’.

“Oh, hell, don’t say it’s an L!”

And then we got a bit less gloomy, but still quite gloomy and reckoned, well, how about a ‘U’?

But no, we moved on again. “Do you know what? It is a ‘V’ after all!” Yesssss!

Except, maybe it isn’t. Maybe it’s a ‘W’.

The letter ‘W’ is now increasingly coming into the conversation when discussing how the economies of New Zealand and the rest of the world recover from the shock of Covid-19.

I am talking of course about what sort of ‘shape’ the economic recovery from the impact of Covid will take.

I generally regard quoting Wikipedia with a bit of caution, but this is a nice summation of the various letter-shaped recoveries.

You can readily see from those descriptions that we really DON’T want an ‘L’. And a ‘U’ would not be too flash either…

A ‘V’ would be lovely but I’m pretty much in agreement with those now moving in the ‘W’ direction.

Does the shape of the recovery matter?

Well, it’s helpful to know just what track you are on, if possible, in order firstly to plan future decisions and to be able to understand why things are happening as they are. And it means we should brace ourselves for disappointment.

Of course everything depends on the virus. If we have another significant outbreak here well then the shape will be PEAR-SHAPED and all bets are off about type of recovery and when. Look what happened across the ditch.

Breathing space

What we have got here at the moment is great breathing space. It’s fantastic that the economy – barring a gaping tourism-sized hole – has been running now without real restrictions for just shy of two months. That’s a way better scenario than I expected.

And it has helped many businesses to do some very valuable catch-up, which likely will leave us much better placed if we do have to contemplate another lockdown. Two months ago I didn’t think our economy would be able to bear another lockdown. Now with two months of a virtually open economy behind us, we might at a pinch be able to. Don’t forget either that Finance Minister Grant Robertson has stashed a $14 billion, lockdown-sized contingency to one side from the Covid Recovery Fund.

To go back to businesses and their catching up, I was very pleasantly astonished at the news recently from one of our larger retail groups Briscoe, which of course was closed during lockdown, therefore making a real mess of its first quarter financial year financial results. Turnover plummeted to $97 million from $150 million in the same period last year.

But, amazingly, in the second quarter Briscoe took in over $195 million, compared with $152 million for the second quarter in 2019. So, in other words it near as dammit made up the lockdown ‘hole’ in revenue. Which is terrific for the company, its employees, and the shareholders. And the economy.

I’ll say again, I’m genuinely surprised at the willingness of people to spend thus far out of lockdown. But I get the distinct impression it's not willy-nilly spending. It's quite targeted and it's meaning that not all businesses are benefiting. What I think, arguably - and you see this particularly with retail - some businesses are given life and relevance by the extra money pumped into the economy by tourists. It's the kind of rising tide floating all ships thing.

But take away the extra tourist spending and businesses that might be a bit marginal are really exposed. And that's likely to tell its own story over the next few months. Retail NZ recently referred to a 'two speed' sector, with around two thirds of retail businesses reporting trade up - and very strongly, with around a third reporting it was down - and very much so.  

We are cashed up

Anyway, we know that a combination of the wage subsidy and the fact nobody could spend anything during lockdown left us generally well cashed up. Surprisingly so.

According to data compiled by the RBNZ the amount held by Kiwi households in the bank increased by a whopping $10.6 billion (5.75%) to just over $195 billion in the four months to June.

During March and April we wiped nearly $1.6 billion off the total amounts outstanding on our credit cards, which was astounding. As of the end of June, however, we had put back about half a billion dollars worth of debt as the credit cards were unleashed post-lockdown and it will be interesting to see what happens over the next couple of months.

Remember that the last of the wage subsidy ends in September. 

As I've said before whatever happens with the employment market over the next few months will be key. And the vexed question of what happens with tourism remains.

So, to go back to the shape of the recovery discussion, while they didn’t use the ‘W’ description, ANZ economists recently made a pretty convincing case for why our path to recovery might well end up being down then up then down again and finally onwards and upwards again. (W-shaped, in other words). A ‘double dip’ recession.

'Filling the hole'

The logic from ANZ senior economist Miles Workman is that (and I’m paraphrasing) we’re already now in the sweet spot when it comes to New Zealanders “filling the hole” of missing overseas tourists. Yep, we’re currently in the ‘low’ tourism season – but what is happening is that Kiwis who might normally be bounding off somewhere warm for a winter break are spending time out and about in NZ and giving tourism operators at least some business. So, they are to some extent replacing at the moment what would be relatively low numbers of overseas tourists.

But come summer of course and, most Kiwis are still going to be around, (maybe some will be sunning themselves in the Cook Islands?) However, loads and loads of overseas tourists that normally come in and really get the wheels turning won’t be here. So, that’s when the impact is really going to be felt.

Hence the real possibility that come the end of this year and into next we’ll be having that unwanted ‘double dip’ back into recession.

Much is going to continue to depend on the appetite of Kiwis to spend. And much of course, as ever, will depend on the virus.

If things go wrong in that regard then we may be in for a 'WW' - for yes, there are folks who have identified that as a 'thing' as well.

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.


Great summary.

Not really - a complete lack of data to put into context. In reality the difference between what International tourists spend here and what kiwis spend on overseas holidays leads to a net of just $7 Billion lost in annual spending, or 2% of New Zealand's GDP. a 2% fall in spending will not lead to a deep W type recession, at most its a mild shallow slowdown and in no way a disaster.

As Chou-en-Lai is reputed to have said when asked about the results of the French Revolution (which, ironically, led to a series of Emperors until CDG popped his clogs) - 'It's too soon to tell'.

Time to ramble down to Pak-N-Save, buy some chicken entrails, and peer at 'em. Deeply, mais naturellement.....

Over in Australia, they started of with a V shaped recovery, then W, U.. Now with Victoria it will be something like a \ or _. may be even a ~

I reckon if you shut business completely and then open, you are never going to get an L, as that indicates everything stays shut. You're going see a V, but the right arm will only come up so far and then stall.


We are cashed up

Puhlease. NZ doesn't go from having some of the highest h'hold debt to the GDP in the world to being "cashed up" in a matter of months. People are still living paycheck to paycheck across all SECs (socio-economic classes) and it's unclear as to the real extent of liquidity if people needed cash. But there's the trade off. If you want a world-beating housing bubble and high housing costs, you cannot expect people to be able to save.


Last I looked total covid payouts were $12 or was it $13 billion. Most paid out in early April. All as lump sums, some to business to then be paid out as wages over time, some to self employed straight to personal bank accounts.

So lets not get too excited about the sate of bank cards and bank account balances to the month of June eh!

The worlds chances of a V shape recovery relied on getting the virus under control and its largely failed to do so.

Even countries that don't "lock-down" suffer big hits to their economies as people change their behaviour. The real worry is that all of this happening in an environment of unprecedented debt to GPD ratios worldwide and years of irresponsible central bank policies.

Satyajit Das said the same thing regarding debt. (I like Das because he's so pessimistic that I feel optimistic by comparison.)

I've seen some interesting stuff of late that suggests that places that have been through substantial peaks, with ~20% of their population now showing antibodies are not seeing any rise in cases as mitigation measures are ended. Implication being that they have actually achieved herd immunity at far lower rates of known infection than anticipated. Case numbers in these places continue to fall away, and are not showing second peaks such as seen in much of USA that didn't get impacted much in march-june.

Global Airlines seem to be predicting that air travel should be 90% of what it was pre Covid by 2023.

So perhaps a W but a big big W with a very low trough and recovery not for several years.

Wet noodle.

I see a VW coming down the road but does anyone really want one?

Clearly Stats NZ has a different alphabet to our economists.

V? As in Virgin?
How long until reality hits Air NZ? (amongst many others)
"Virgin Atlantic filed for Chapter 15 bankruptcy in New York on Tuesday, part of a process to protect its assets from US creditors as it scrambles to finalise a rescue plan"

Unemployment rate has fallen from 4.6% to 4. So more people now employed than before the lockdown. WoW

Read between the lines for this..

Ignore unemployment rate, look at labour force participation rate.

I think we should grant 100k to first home buyers and an attractive 50 year mortgage at - 12%. Great for the economy and productivity. And as Mike Hosking says "House price inflation makes us all richer" with all those gains it means we can spend on luxury items. Because house price gains are productive then there will be zero inflation on consumption.

Its peaked, its all coming to and end, it was "just a little Flu"
According to the latest numbers from the CDC web site and looking at the daily increases in infections, BUT of course, these numbers are no longer just collated by the CDC, they are collated by the Trump administration now, and then the Sanitised numbers are passed to the CDC.
So no wonder infections are slowing down in the USA.

Does the shape of the recovery matter?

Emphatically, yes.

ATEED Crisis Summit today to try and put some focus on employment prospects for Auckland. John Key's comments. Key said equity and property markets were presently being cushioned by record-low interest rates and healthy surface-level business activity - such as busy used car lots and apparently busy restaurants - masked an underlying economic crisis the country would feel for years.
An attempt to shift opinion and up the fear levels pre-election in the city that will decide the next government. Not saying he is wrong though. The majority of people still have their government-funded blinkers on at the moment.

John Key and ATEED. Two very expensive relics of the not-too-distant past

According to data compiled by the RBNZ the amount held by Kiwi households in the bank increased by a whopping $10.6 billion (5.75%) to just over $195 billion in the four months to June.

Possibly, savers were positioned in another form of bank liability, (Liabilties ($m) line 11) namely bank debt securities which partially matured over the same period to the tune of $7.222 billion? Is it possible some of the redemption proceeds found there way into depositor's accounts?

Amazing no commentary on the world economy is included the simply reality is our prosperity is almost totally dependant upon a global economic recovery or otherwise. The US and Europe are suffering from massive unemployment and business failure in spite of trillions being thrown at the problem all in the hope that a vaccine will emerge soon currently thats looking unlikely. Hopefully we still have time before severe economic damage is inflicted upon the world

1990 New Zealand private debt to GDP ratio of 29%. By 2018 it was 94%. If things get much worse. It will be. More printing, negative interest rates, NZ$ devaluation and then (hopefully gradual) inflation. That is the economic equivalent of cooking a souffle. One wrong move and it all goes sideways. Oh, and there is still a global pandemic to deal with at the same time.

the potential exists for a V followed by an L

I'm sincerely worried that the government will keep up the misguided attempts to eradicate the virus. This is destroying the New Zealand economy.

For anyone who's interested here are well reasoned articles referencing the latest peer reviewed science showing exactly why we should be opening up the economy..

Conspicuous lack of any actual data in this opinion piece. Let me add some:

1. Annual tourism spend in NZ: $40.9 billion (International tourist spend: $17.2 billion / Domestic (kiwis) tourism spend: $23.7 billion)
2. Kiwis Annual spending on overseas Holidays: ~$10 Billion
3. Size of NZ economy to March 2020: $314 Billion.

So International tourists account for $17 Billion in spending here, but Kiwis spend $10 Billion on overseas holidays - so net loss is about $7 billion in spending. This means the net loss of $7 Billion from tourism represents a tad over 2% of the economy. A 2% drop is in no way a disaster all things considered, and easily managed. Those trying to hype it up into some sort of impending doom are either idiots or have a vested interest in scaring people.

Thanks - It's great to get some hard numbers like that. However I think it's wrong to compare that 7 billion to GDP. You should be subtracting it from NZ's balance of trade! Last year our balance of trade (according to trading economics) was only 0.426 billion!

Another thing to look at domestically is bank lending which according to the latest RBNZ C5 data has done this. If you add it all up then it's not a pretty picture.

Sorry I should have clarified that I think the $10 Billion spent by kiwis on overseas holidays will instead stay in New Zealand, and probably all spent here (with a little being saved for eventual overseas travel)