Today's Top 5 is a guest post from Ryan Greenaway-McGrevy, senior lecturer in economics at the University of Auckland.
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Auckland Chamber of Commerce Chief Executive Michael Barnett reacted to our return to level 3 in Auckland by stating that extending the lockdown beyond three days would be a “disaster for business” – implying that business would be better served if it were permitted to stay open. But consumer confidence matters, and we should not expect household discretionary spending to continue at pre-pandemic levels in a world in which COVID-19 is prevalent in the community.
Going back to business-as-usual is not possible in the immediate post-pandemic world, and policy options are about minimising the fallout from the virus. We are now eight months into the global pandemic, which affords us the opportunity to take a look at economic data at home and abroad in order to gain an impression of the impact of the virus and various policy responses on business activity.
1) New Zealand.
Whereas the US and the EU produce preliminary estimates of GDP one month after the close of the quarter, here in New Zealand we must wait about two and a half months before an estimate of GDP is released. Statistics New Zealand will announce its first estimate of Q2 GDP growth on September 17. Until then we must rely on other sources.
Massey University’s GDP Live nowcast is estimating a 16% quarter-on-quarter decrease in nominal GDP for Quarter 2. That is a significant decline when compared to the EU or the US, but it makes sense given that the level 4 lockdown spanned much of the quarter. And, of course, our COVID mortality rate is far below that of the US and many European countries.
Once the official GDP estimate comes out in September we will begin to grasp the global impact of COVID on our exports, and how the lockdown affected household consumption. Unfortunately it won’t be able to tell us about the effect of the loss of international tourism on the economy, as this requires a separate satellite account to distinguish between the spending of residents and international tourists.
2) United States.
The haphazard US approach to the pandemic has dominated global media, with various States yo-yo-ing between lockdown, containment and reopening strategies. On a per capita basis, COVID mortalities are among the highest in the world, but still remain below that of Sweden, for example, which has also received significant media attention for its less stringent approach to the pandemic.
Real GDP fell by 33% at an annualized rate in Quarter 2, which is equivalent to about a 7.4% decline over the quarter. Nowcasting models indicate that a rebound is underway in the US. The New York Fed’s nowcast for Quarter 3 growth is 14.6%, which is equivalent to 3.5% quarter-on-quarter. The Atlanta Fed and St Louis Fed Nowcasts are more optimistic, calling for 25.6% and 23.4% growth (annualized).
Nonetheless, these figures imply that the rebound in the US is only partial. Work by the team led by Raj Chetty at www.tracktherecovery.org helps us understand why. Consumer spending is down by about 4.4% relative to pre-pandemic levels, and household consumption represents 70% of the US economy. That may not seem too bad, but a lot of household consumption does not support jobs: On average we spend between 20% and 35% of income on housing services, which perhaps keeps a few professional landlords in paid employment. Drilling down, we see that spending in sectors that do support a lot of low wage jobs has been hit hard. Spending on entertainment, travel and restaurants is down between 25% to 50%. Retail is doing OK, but I suspect much of this has shifted online, supporting jobs in warehouses and logistics at the expense of shop-front workers.
These patterns illustrate that re-opening does not mean a return to business-as-usual when the risk of community transmission is not negligible.
Well-known for taking a relaxed approach to the pandemic that eschewed severe restrictions, Sweden has nonetheless felt the economic impact of COVID-19. Early estimates indicate that Swedish GDP declined by 8.6% in Quarter 2. Much of this could be due to falling demand for Sweden’s exports, which make up close to 50% of their economy. Sweden will release its next estimate for Quarter 2 on 28 August, and this should provide further insight into the impact of household consumption and exports on economic activity.
ACT leader David Seymour reckons we can and should implement a less severe containment strategy that follows the Taiwanese model. Unlike Sweden, Taiwan has managed to stay open while maintaining an exceptionally low mortality rate. While New Zealand has since adopted some of the more easily-implemented Taiwanese policies, such as mandating masks on public transport, a constructive and balanced discussion about whether we have the health and information infrastructure to emulate the entirety of their approach would be a welcome contribution to the public debate. That debate should include health professionals working on the front lines of the pandemic response.
In terms of economic activity Taiwan has also done remarkably well. Real GDP fell by only 5.48% at an annualized rate in Quarter 2. That is equivalent to a 1.38% decrease over the quarter. The country reacted swiftly to the pandemic, closing their border in January, and has not imposed lockdowns. That swift action appears to have paid off, although Taiwanese economists I have contacted still perceive a decline in discretionary spending due to concerns about COVID in the community. That view is consistent with expenditure-side decompositions of GDP, which reveal an approximate 10% annualized fall in private consumption expenditures. Consumer confidence matters.
5) European Union.
Preliminary estimates by Eurostat show that GDP declined by 11.9% in Quarter 2. But there is substantial regional heterogeneity underlying the headline figure, with Spain experiencing an 18.1% decrease, while Lithuania experienced only a 5.1% fall.
More timely indicators suggest that the EU economy may have since turned a corner. The IFO institute’s business climate index rose between July and August, indicating that large business leaders in Germany have a more favourable view of business conditions compared to a month ago. Perhaps a rebound is already underway in Europe’s largest economy.