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Oh sweet summer child, winter is here

"Summer is the time for squabbles. In winter, we must protect one another, keep each other warm, share our strengths." - George RR Martin

What does Game of Thrones have to do with economics and recessions? Not an awful lot, though I'm pretty sure Ned Stark must have faced a few economic crises as Lord of Winterfell. Fortunately, economist fan fiction on Game of Thrones doesn't really exist, so we don't know how he handled them. That being said the notion that "winter is coming" strikes me as very pertinent to our current economic climate with coronavirus and lockdown.

Every 10 years or thereabouts we have some major global economic crisis. Some European countries aside, developed economies have mostly been going alright in the years since the Global Financial Crisis (GFC). Unemployment has generally been low or falling, asset values have surged driven in no small part by low interest rates, inflation has been under control and the economy has been growing steadily. Great new technology was launched (eg electric cars and smart watches) and travel between countries hit an all time high. That doesn't mean it was all rosy, inequality within developed countries increased and there was Trump and Brexit. But the economic crisis we are facing with coronavirus dwarfs anything else we have experienced recently. Summer has been pretty good, but there are chilly times ahead.

Often recessions are driven by markets, finance and banking. This time it is a health crisis. We have learnt a lot already about how to deal with the disease but are now grappling with the economic side effects. Technically the world isn't in recession yet, that requires an economic decline across two quarters. We will be in recession soon. Depressions are longer with a bigger hit to GDP. I hope we aren't in for one of those.

Walking into economic headwinds caused by covid-19

Recessions come in multiple shapes and sizes

Recessions could be "V" shaped where the economy bounces back quickly. "U" shaped where the economy contracts and comes back slowly over time. A "W" is a double dip recession. By and large the commentary we are seeing on coronavirus suggests that that it will be a massive sharp contraction with a moderate bounce back after lockdown ends, and a slow return to normal. Sort of a mix between a "V" and a "U" shape. What that suggests is that while life will be somewhat more normal after social distancing restrictions are lifted, we can expect a long-term hit to employment and GDP. For most people, it will be the biggest recession of their lifetimes, at least so far.

We can expect a long-term fall in demand. Simplistically speaking - a fall in demand is a reduction in spending. Coronavirus has created substantial anxiety. Even when the lockdown has ended people will still be nervous travelling or going to crowded areas. That means less spending. In New Zealand, we rely on people travelling to fuel our tourism industry, which up until recently was our biggest export industry. With tourism taking a hit, room occupancy will plummet, and with it take down many people employed in accommodation services. Cafes and restaurants are key to supporting people's leisure activities and contribute significantly to the economy. Food joints rely on large numbers of people and have seen revenue melt away. The bounce back in tourism and hospitality will be a long time coming. People aren't driving as much which hurts mechanics, petrol companies and automobile sales; but probably helps insurers. Consumer confidence isn't going to come back over night.

With the fall in demand many businesses will struggle and lay off staff as remaining profitable becomes challenging. We can expect this economy wide, not just in hospitality and tourism. The flow on effects from the fall in demand hit major organisations important to our needs like utilities, food production and construction. Think about builders - how are you meant to build a house efficiently with social distancing restrictions? Lack of demand globally combined with more stringent restrictions affects shipping which can hurt export businesses. Large-scale bankruptcy is inevitable. Many organisations aren't able to do their jobs properly with social distancing controls, this affects both them and their suppliers. We can expect much lower economic productivity. Rebuilding this lost capability will take time.

Governments are spending up big time to create jobs and stabilise the economy

In New Zealand, government stimulus has meant subsidies to employers to retain employees, and looking at investing in infrastructure projects when lockdown ends. Recently the idea of helicopter money was floated, a one off payment to all citizens. In the US the Fed has cut rates and employed quantitative easing. The US Government has approved hundreds of billions in stimulus. Other countries are trying similar strategies. We are lucky that borrowing and taking on more debt is cheap right now. Nevertheless, this spending has to be paid back at some point. Don't be surprised if new forms of tax are implemented.

Early employment data paints an ugly picture. In the US, unemployment surged to over 22 million people in the past month. US unemployment is forecast to reach about 10%. In New Zealand we have little cause for celebration either. The number of recipients of job seeker support has spiked close to 170,000 in a country of approximately five million and we have low business confidence. Though we are close to eliminating the virus which is good news. We can expect unemployment to be a big social issue for years to come and higher rates of social welfare.

So what? Well the short answer is it means we are less well off materially than we were. But, the distribution matters. If you maintain a full-time job and keep getting paid well, you may not be affected much at all beyond the general bad feelings that come with recession. For those who lose their jobs, there will be a material hit in consumption which could affect their well-being. All of this puts things in perspective. When times are tough, as we can expect them to be, people must band together. We should accept that other people will need our help and be willing to contribute towards that.

Recessions typically last between 6 and 18 months though it's hard to pick an exact time frame. With a vaccine not coming out till probably some time in 2021, it could easily go on longer. The length of time we are in recession will depend in large part on the effectiveness of government stimulus locally and internationally, and how quickly people get their confidence back and start spending again. My feeling is that will take some time. Even after a vaccine is available life won't just turn back to normal. Winter is coming. Best to stock up on blankets, not toilet paper.


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