Shutting Down the Economy

The New Zealand government has put the people of the nation under a lock-down. People cannot leave home, except for exercise, going to a pharmacy or supermarket and essential work. All non-essential businesses have been shut down. We are now nearly a week into a four-week shutdown. However, there is no guarantee that the shutdown will end when the four weeks are complete.

Although unavoidable, I suspect that the harm done by the economic shutdown could be more serious than the health crisis brought about by coronavirus.

Many small businesses are already struggling due to the collapse of the markets into which they were selling. Some are only just keeping ahead of their expenses on a week by week base. The worst-hit are tourism and hospitality-related businesses. These businesses are operating in a very competitive sector with very little to come and go on.

While businesses are closed and earning no income, they will still incur costs. They will have to pay the rent on their buildings and the costs of many of the services that they buy regularly, such as electricity, communication and IT services. Hire purchase payments for vehicles will have to be made. Interest on any debt will have to be paid. Some of these expenses might be deferred, but they will have to be paid eventually out of future earnings that could be significantly reduced.

Like governments all around the world, the New Zealand government will try to keep things going with additional support payments and the central bank will make credit available to banks so that they can lend to businesses. Unfortunately, additional credit will not be enough to keep some businesses to keep going. Most will already have significant debt, so providing them with an additional loan is not really a solution. More debt will just add to the burden that will make it difficult for them to get going again. What they need is more paying customers, but that will not happen in the short-term.

The wage subsidies will help some businesses, but others will struggle to make up the difference between the subsidy and the normal wages, if they are unable to operate. Unless the virus is stamped out quickly, the shutdown might have to go on much longer than expected.

The economic decline could drag on for much longer than many people expect. Many businesses that have had to shut down will not be restarted. Some small business owners will not have the emotional energy to take on more financial commitments to get started again in an uncertain economy. They will choose to get out before their situation gets worst.

Many big businesses also have very tight cashflows. Those who do will struggle, because many of their outgoings and expenses will continue, while no money is coming in. Those operating on very tight margins may find it is too hard to keep going, especially if the shutdown goes longer than initially expected. Many will try to shorten their supply chains, but this will make their inputs more expensive, as specialisation declines, which could reduce their profitability.