Tag Archives: Coronavirus

Covid19 and unemployment – BBC Podcast

BBC World Service - The Real Story, Newshour Extra: Welcome

Below is a link to a very good podcast from the BBC ‘The Real Story’. Dan Damon discuss what should be done about rising unemployment in the age of Covid-19? Contributors include Australian economist Steve Keen author of ‘Debunking Economics’. Topics of debate include:

  • Universal Basic Income
  • Modern Monetary Theory
  • How much debt can a government sustain in propping up an economy?
  • Should a government subsidise companies taking-on workers?

Also features a very good interview with Daniel Susskind – author of ‘A World Without Work: Technology, Automation and How We Should Respond’

It is 53 minutes long but can take your mind off the commute to work.

https://www.bbc.co.uk/programmes/w3cszcnf

Eight body problem in economics

Physicists and mathematicians have puzzled over the three-body problem – the question of how three objects orbit one another according to Newton’s laws. No single equation can predict how three bodies will move in relation to one another and whether their orbits will repeat or devolve into chaos.

John Mauldin of Mauldin Economics wrote about the eight-body problem in economics in which we cannot predict how the economy will react when eight variables change. He lists the following:

What is certain is that as government fiscal intervention starts to lose its effectiveness it will be inevitable that monetary policy will continue to remain very accommodating with bond buybacks and record low interest rates. COVID-19 has turned conventional economic thinking upside down.

Reduced inflation in New Zealand with Covid-19

The inflation rate in New Zealand, as in many countries, is on a downward trajectory – it will take a lot of stimulus form the Reserve Bank to meet its policy target agreement of maintaining the CPI between 1-3%. Westpac have forecast a drop to 0.2% in 2021 and to remain below 1% until the middle of 2022. There have been some obvious reasons for less pressure on inflation:

  • Demand for goods and services both in NZ and overseas has dropped significantly and tamed any inflation. Most notably there has been a major drop in oil prices.
  • The use of ecommerce and, without the overheads of rents / staff, prices are often much lower than the high street.
  • With zero net migration and as excess capacity in long term rental market prices haven’t moved. Add to this the Government’s rent freeze.
  • A lack of tourist dollars has meant a shift inwards of the aggregate demand curve as exports of services fall – AD = C+I+G+(X-M).
  • With people having the growing uncertainty of job security there has been little additional spending or borrowing with the threat of redundancy hanging over them.
  • The wage subsidy has kept some companies afloat but there has been no room for wages increases/negotiations for such uncertain times. Therefore consumer spending has been limited compared to previous years.

Important to note that inflation figures that are quoted are usually on a yearly basis so it is the change in prices from today to this time last year. It will be interesting to see what state the economy will be in this time next year.

Unemployment drops in New Zealand

I was surprised to see the official unemployment figures issued today – down from 4.2% to 4.0%. However this reflects those workers that were laid off but unable to seek further employment due to the Level 4 lockdown but still included in the labour force. Remember the unemployment calculation is those people who are unemployed and actively seeking employment.

According to the ASB a better measure in the current environment would be underutilisation – It is defined such that jobseekers outside the labour force are captured (unlike the unemployment rate) and includes people working part-time who would like to work more hours. Utilisation rose from 10.4% to 12%. The unadjusted LCI, more of a ‘raw’ measure of wage costs, rose just 0.4% qoq, with annual growth slowing from 3.8% to 3.1%. Average hourly earnings from the QES slowed to 2.5% yoy for private sector workers, a multi-year low.

End of wage subsidy

Although these were positive signs for unemployment figures later in the year it is inevitable that these figures will deteriorate when the wage subsidy ends and we return to an economy which isn’t propped up by government spending. Unemployment is forecast to peak at 9.8% in September.

Source: ASB Bank – Economic Note – 5-8-20

Modern Monetary Theory – The Deficit Myth

I have blogged before about Modern Monetary Theory. Basically it says that you can print your own currency by having your own central bank, run large deficits, have full employment, have no inflationary pressure and do this year after year. However while large deficits and monetary stimulus make some sense during a short deflationary economic contraction, sustaining those policies for years, will lead to inflation and economic stagnation – stagflation. The video below is from BBC Reel where Stephanie Kelton, author of The Deficit Myth, argues that we need to rethink our attitudes towards government spending. Worth a look – great graphics.

Domestic tourists needed to bolster GDP in NZ

Although in New Zealand the containment of the Covid-19 has so far been successful, with no international visitors the tourism sector has seen a sharp downturn. Those that have suffered most are the smaller operators and bars, restaurants, accommodation providers. Even with the wage subsidy a lot of these firms have been forced out of business. Domestic tourism will be essentially for the survival of a lot of the tourist spots around the country. The return of overseas visitors is some way off and even when restrictions are lifted visitor numbers are likely to be limited.

Visitor arrivals in New Zealand

Source: Westpac Economic Overview – May 2020

Before Covid-19, Tourism was New Zealand’s largest export industry in terms of foreign exchange earnings. It directly employed 8.4 per cent of the New Zealand workforce. For the year ended March 2019:

  • the indirect value added of industries supporting tourism generated an additional $11.2 billion, or 4.0 percent of GDP.
  • tourism as whole generated a direct contribution to gross domestic product (GDP) of $16.2 billion, or 5.8 percent of GDP.
  • international tourism expenditure increased 5.2 percent ($843 million) to $17.2 billion, and contributed 20.4 percent to New Zealand’s total exports of goods and services.

As the economy struggles along people will be concerned about job security and look to be a lot more cautious with spending. However having been restricted during the lockdown there is the hope that New Zealanders will want to travel domestically.

Source: Tourism New Zealand

Income Elasticity of Demand and Consumer Purchases Post-Covid

I came across this material on the blog ‘Sex, Drugs and Economics’ which discusses Bruce Wydick’s post on his blog ‘Across Two Worlds’. This is very useful for NCEA Level 3 and CIE AS Level Unit 2 both of which look at Income Elasticity of Demand.

Wydick looks at who is most likely to do well and who is likely to suffer in a post-covid environment. A typical recession is generally caused by supply-side factors (oil crisis years of 1973 – prices up by 400% – 1979 – prices up by 200%) or demand-side impact (loss of business confidence and consumer confidence). Covid-19 is very different as it is a complete shut-down of certain businesses and it forced people to stop buying things that they normal do. Wydick puts goods and services into two categories:

Snap-Back goods and services – things we couldn’t buy during the Level 4 lock-down period but were purchased when we went to Level 3. Pent up demand meant that purchases of these goods and service might have been higher than normal – buying less now means buying more later.

Gone Forever – as it states. Invariably this generally refers to services like air travel, tourism, haircuts, public transport and entertainment. When it becomes safe to have a haircut you still only get one haircut as the rest of your haircuts have disappeared and there is no catch-up spending like with snap-back goods.

These are the differences between goods with low versus high income elasticity. Income elasticity of demand measures the responsiveness of quantity demanded to changes in income. We can have different types of normal goods. If a 10% increase in income brought about a 10% increase in quantity demanded, we can say the income elasticity of demand is unitary. If EY>1 we classify the good as a luxury, and if EY<1, a necessity.

Income elasticity of demand will also affect the pattern of demand over time. For normal luxury goods, whose income elasticity of demand exceeds +1, as incomes rise, the proportion of a consumer’s income spent on that product will go up. For normal necessities (income elasticity of demand is positive but less than 1 and for inferior goods (where the income elasticity of demand is negative) – then as income rises, the share or proportion of their budget on these products will fall. Wydick puts the different types of purchases in a simple 2 x 2 matrix“Snap-Back” vs. “Gone Forever” and High vs. Low income elasticity. 

It then becomes easy to see which industries are in the most trouble in 2020.  So, when goods and services are both “gone forever” and have a high income elasticity, we can expect the impact of the coronavirus pandemic to be most severe. Wydick identifies air travel, tourism, sporting events, hospitality, and transport (but not public transport). Everything else either snaps back and experiences some catch-up spending, or isn’t as affected by lower incomes. Goods that have a high income elasticity means that when you lose your job during the recession, you and others like you are even less likely to buy these things. For New Zealand the decline of the tourism industry is a significant hit to GDP and employment in this sector.

Covid-19 and GDP components in New Zealand

New Zealand has been seen by many as a country which has so far done well to restrict the spread of Covid-19 and hopefully limit the longer term impact on the economy. Like many countries the economic consequences have been significant with the contraction of GDP and rising unemployment. New Zealand is now in a deep recession – negative GDP for two consecutive quarters – with GDP set decline by 17% through the six months of the year. By comparison NZ only fell by 2.7% during the GFC in 2008 and part of 2009.

The graph (from Westpac) below shows the importance of government spending in 2020 and continuing into 2021. But the reduction in household spending, residential construction and business investment are a major concern and invariable this will lead to a further loss of job. However the forecast for GDP in 2021 is more promising with household spending and government consumption being the engines of growth. Although some are saying that the recovery will be faster than after the GFC one has to remember that the GDP figures will be a lot higher as they coming from a very low base – even negative. So even a small increase in economic activity will give you a very large percentage change from the previous year. The government have spent approximately $22bn in support measure which is equivalent to around 7% of annual GDP and no doubt there is more to come.

Source: Westpac Economic Overview – Covid-19 Special Edition May 2020

Aggregate demand is crucial here and it is important for both Cambridge and NCEA students to understand its components and how it generates growth – see midmap below.

Adapted from Susan Grant – CIE A Level Revision

Central and Eastern European (CEE) economies costs and benefits from Covid-19

The impact of Covid-19 on countries like China, and other parts of Asia, has meant that firms in the large economies of Germany and France might not be keen to outsource work to Asia. Although the infrastructure and the resources are available in these countries the Covid-19 risks associated with them means some European companies are looking at options closer to home – also referred to as “nearshoring” (moves by China-wary western European manufacturers to bring production closer to home). CEE countries especially Czech Republic, Hungary, Poland, Slovakia and Romania are particularly strong in the manufacturing sector whilst Estonia, Latvia, and Lithuania (Baltic states) have a comparative advantage in services. Although outsourcing will help these economies it will take a bit of time before there is any significant change.

This is an optimistic view but for some Eastern European countries the GDP forecast has been worse than that experienced after the GFC.

With the fall of the Berlin Wall, the transition from command to market systems led to severe recessions within countries – accelerating inflation and very high levels of unemployment – GDP fell by over 40% in the old Soviet-bloc countries. The present recession is proving to be much worse and these Eastern European countries are particularly vulnerable. The Economist came up with three reasons:

  • These economies are exported dependent – as a % of GDP exports are 96% in Slovakia, 85% in Hungary.
  • Eastern European countries will find it hard to fund deficits as their credit rating tends to be a lot lower than other countries wishing to borrow money. Bulgaria’s rating is BBB compared to say Austria which is AA+
  • A lot of these countries rely on tourism as part of GDP therefore with Covid-19 the tourist industry has all but disappeared. For Croatia that is about 25% of GDP.

The outlook looks especially bleak for economies that were in a poor economic condition before Covid-19. Even though there have been radical steps taken to nullify the economic impact of the virus it will take a strong and coordinated response at EU level to steer countries out of their economic hardship.

Source: The Economist – Eastern Europe’s covid-19 recession could match its post-communist one. 28th May 2020

Low income groups struggle in post Covid-19

From The Economist – very good explanation on the impact of COVID-19 on the entertainment / service sector. Often it is the low income groups that would be severely affected as they tend to work in the service industry especially – also not being able to work from home. As these groups tend to live from pay check to pay check they will struggle to maintain any quality of life. They are unlikely to have savings to call upon and will depend on handouts form the government in the form of unemployment benefit or the wage subsidy. What happens when government support runs out? The video is well worth watching.