Tag Archives: Coronavirus

COVID-19 and a fairer economy

FT European Economics Commentary Martin Sandbu believes the COVID-19 pandemic is a once-in-a-lifetime chance to rebuild better economies that work for everyone. Sandbu author of ‘The Economics of Belonging’ – see previous post – talks here about the polarisation of rich societies since 1980. The main points of interest that he raises are below. Worth a look.

  • 1980 – large number of jobs available in factories start to disappear.
  • Globalisation – not the main cause of unemployment but technology has taken a lot of the manual and clerical jobs (structural unemployment) and retail has gone online.
  • Tax systems have not redistributed income – unions have been in decline.
  • Rural areas worst effected – good jobs more prevalent in cities so rural areas suffer.
  • Low paid service jobs have been impacted by COVID-19. Also as they involve contact with others there is more exposure to the disease.
  • Pandemic catalyst for change. History tells us – US Great Depression = New Deal, 2nd WW = postwar welfare state.
  • Technology change is with us so the need to find new ways of working. Do we have a Universal Basic Income (UBI)?
  • Lower burden of employing workers – less income tax, payroll tax and generally make it cheaper to hire people in to better jobs. Make up the shortfall in revenue elsewhere.
  • With the significant increase in inequality – introduction of a wealth tax. Also a tax on carbon emissions and redistribute to help the worse off.
  • Greater need to overcome regional inequality within countries
  • Need to the political will to make economies work better for everyone.

Countries with early lockdown top the list for GDP in 2020

Below is a useful graph looking at the 2020 GDP levels in most developed countries. New Zealand had a quick rebound with its elimination strategy, a supportive fiscal response and an expansionary monetary policy. The 2020 GDP figures considered the scale of lost activity from the COVID-19 lockdown as well as the rebound when restrictions were lifted. There seemed to be the trend that early lockdowns led to better GDP figures. Taiwan (2.98%) and China (2.3%) were the only countries to experience positive growth levels with New Zealand down 2.9% compared to 2019. Taiwan’s investment into public health infrastructure pre-COVID-19 enabled them to avoid a national lockdown. Early screening, effective methods for isolation/quarantine, digital technologies for identifying potential cases and mass mask use led to a much more controlled environment. China did experience a positive growth rate (2.3%) but this was well below 7% which they have been averaging since 2010.

However it is important to be aware that some countries were more impacted by COVID-19 than others, not only because of their hesitation to lockdown but also their reliance on certain sectors for GDP growth. Countries like Spain, who are very dependent on the tourist industry were hit hard by the pandemic. Many emerging and developing countries were already experiencing weaker growth before the pandemic struck.

Source: Westpac Bank

Global GDP levels June 2019 – December 2020

A recent publication from the ANZ looked at the GDP in a range of economies. Useful for discussion in class if you are doing GDP and business cycles.

Note:

  • China has rebounded well
  • UK and Euro area had the more severe downturns
  • New Zealand has the steepest rebound from a lockdown period
  • Interesting to note that the bottom of the downturn in all countries is in June 2020 with the exception of China.

Global GDP levels (Q4 2019= 100)

Source: New Zealand Weekly Data – 19th March 2021.

Inflation – an historical overview and how will covid-19 impact prices?

This is a very good video on inflation from The Economist – it discusses why over the past two decades inflation has remained low in good times and bad. There is a brief look at historical rates of inflation and policy with reference to Bill Phillips (Phillips Curve) and Paul Volker (US Fed Chairman) who increased the prime interest rate to 21.5% in 1981 to tackle inflation. Also low interest rates and government fiscal stimulus could start to see an upward movement in the inflation figure. Very useful for Unit 4 of the CIE AS and A2 Economics course.

Covid-19 stimulus vs GFC stimulus

Below is a useful diagram from McKinsey & Company that compares the money used to assist the economies after the outbreak of Covid-19 and the GFC in 2017. Governments allocated US$10 trillion for economic stimulus in just two months—and for some countries, their response as a percentage of GDP was nearly ten times what it was in the financial crisis of 2008–09.

Countries in Europe have allocated around US$4 trillion which is approximately 30 times than that of the Marshall Plan in today’s value – the Marshall Plan was valued at $15bn in 1948. The size of government responses are unprecedented and they, with central banks, are moving into new territory. Global debt is estimated to reach US$300 trillion by the March quarter in 2021 with global GDP taking a huge hit. However unlike the GFC there seems to be an end point once an effective vaccine has been found but many jobs and businesses have gone and it will take time before new ones appear.

Models of Capitalism – LMEs vs CMEs during COVID-19

The Economist Free Exchange recently ran an article looking at the various taxonomies that are used to categorise models of capitalism. The book entitled “Varieties of Capitalism” (2001), distinguished between liberal market economies (LMEs) and co-ordinated market economies (CMEs).

LMEs’ rely on market mechanisms to allocate resources and determine wages, and on financial markets to allocate capital. E.G. America, Britain and Canada
CMEs, like social organisations such as trade unions, and of bank finance. E.G. Germany, Sweden, Austria and the Netherlands

Western economies tend to sit on a continuum between these two models – below is a table outlining the main criteria each:

Source: Wikipedia

Which system is better during a pandemic?

During the pandemic, CMEs have generally had a more sound strategy for containing the spread of the virus. This may be generated by unity and consistency than by the strength of the intervention that is chosen. Some countries, e.g. Sweden, avoided lockdowns completely but seemed to get a lot of public support and relied on voluntary social distancing. New Zealand implemented a lockdown policy from the outset and relied a lot on contract tracing as well as strict system of managed isolation. LMEs such as the USA and the UK have had a policy which have been on the whole disorganised and not taken the virus seriously.

However in such situations and because of their innovative nature LMEs are more likely to focus on treatments and vaccines.

Of 34 vaccine candidates tracked by the World Health Organisation
CMEs = 4
LMEs = 13
(AstraZeneca, an Anglo-Swedish drugmaker working with Oxford University, straddles both categories).

CMEs are likely to have a lower death count but LMEs seem to hold the upper hand with regard to a vaccines. Maybe a global coalition and co-ordination is needed in future to get the best of both systems.

Source: The Economist – Which is the best market model? 12th September 2020

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