Restarting the Economy

Shutting down the economy for a few months will have serious consequences. The production that is lost is gone forever. It will never be recovered. Of course, shutting down activities that have no benefit, such as casinos and creating financial derivatives, does not matter. But the production that has value will be lost for good.

There is no obvious way that the current economic crisis will end. If the virus is still active when the current four-week lockdown introduced by the New Zealand government is finished, it will have to be extended, or the cost of the initial shutdown will be wasted.

The problem is that political leaders are driving blind. They do not have a set of criteria for determining when the shutdown can be safely ended and when borders can be reopened. If the restrictions are ended too soon, greater reinfection and fear will ensue.

People are hoping that an effective vaccine will be developed quickly. This is not as easy as if often assume. A vaccine that works in the laboratory is not always easy to get into the field. The flu vaccine is happy being carried in egg yoke, but other vaccines might not be so easy to deliver. We should not assume that a vaccine can be developed, as there are many viruses for which no vaccine has possible. For example, there is no effective vaccine for the common cold.

Even when the virus is defeated here in New Zealand, it will still be active in other parts of the world. The spread will continue much longer in Africa and the refugee camps and war zones created by the US wars in the Middle East. This means that the government will have to be very careful about reopening the borders. There may be very strict controls over international travel for quite a long time.

Some businesses will gear up again quickly. After the shutdown finishes half the country will feel like they need a haircut, so hairdressers and others providing personal services will be busy. People will desperate to go shopping, so malls should open quickly, even if some shops are gone (if malls do not give rent holidays). The uncertainty will make many people nervous about spending, some demand for appliances might be quite slow for some time.

Manufacturing might be more difficult. Some manufacturers will find their customers are shut down and do not want to buy more stock. Others will find that suppliers cannot provide the inputs they need.

Companies providing business service might find they are discretionary until their clients get back onto a stronger footing.

The future of the construction industry will depend on how the demand for houses is affected by the shutdown. The uncertainty caused by the virus and the shutdown might make people and businesses reluctant to commit to big contracts until the economic recovery is more certain. By then some construction businesses might be gone.

The hospitality sector will struggle. People will be reluctant to travel and eat out until it is clear that all risk is gone. They will be keen to get out for a meal again, but will continue to be fearful for a while, and tourists will be gone, so the hospitality sector could struggle for a while. Some that have closed will probably find it too difficult to get started again if customers are scarce. If there are regions that are still shutdown because there are clusters in which the virus is still spreading, people will be very careful about travelling for many months and perhaps years.

Savings will likely increase. People who are getting up toward retirement age will have seen their value of their superannuation funds decline sharply. When they start saving seriously, they will have less spare money to spend on goods and services. Many other people will be saving hard to deal with the uncertainty that they are facing.

Strict limitations on international travel will have to be kept in place for quite some time. International visitors might need to be quarantined to reduce the risks. This means that it will be many years where the tourism business gets back to the level it was at before the virus. The government might decide that tourism is too risky for it to be a significant industry in our nation.

If the world shuts down for a couple months, it will not recover quickly and return to normal. Businesses will not restart in an orderly, logical way. Instead, the start-up will be discordant. Some business who restart will find that their supplies have not started. Others will find that the businesses that they supply have not restarted. Many businesses will find gaps in their supply chain because businesses have shut down and cannot afford to reopen.

The greatest problem is that the coronavirus shutdowns come at a time when the world economy was already weak. I have explained in a previous post, the economic vulnerabilities that will be a drag on the restoration of the economy.

New Zealand is a trading nation. Exporters could find that demand for their goods and services is weaker while the world economy is slack.

In a modern economy everything is linked. Some other linked directly, by buying an selling, but others will be affected indirectly. If one part of the economy suffers, all parts suffer to a greater or lesser degree. For example, homeowners who are using Air BNB to supplement their income will find that with tourism gone will find they have less money to spend. The businesses that supply their coffee will suffer. Although some of these effects are small, some businesses will face many of these small negative effects which together become a big effect. Many small cuts can quickly become a large wound.