Human Rights, The Treaty of Waitangi and Governance | Institute of Policy Studies | Victoria University Wellington
 


Roundtable discussions on the recession

During April and May the Institute of Policy Studies and the New Zealand Institute are hosting roundtable discussions on the global financial crisis and the economic recession. 

This follows the IPS forum on the recession held in November 2008.

Summaries of the discussions are set out below.

After the G20 summit: the state of the global economy and a ‘new deal’ (9 April 2009)

The G20 summit was held in London on 2 April. It provided an opportunity for leaders of the world’s major economies and international institutions to discuss a response to the global financial crisis. 

The scale of the global economic recession is significant.  The OECD predicts that real world GDP growth will fall by 2 ¾ per cent in 2009, and to recover by 1 ¼ per cent in 2010.

The summit communiqué sets out the intentions of G20 leaders ranging from:

One of the key actions agreed at the G20 was to increase the available resources of the IMF for the purposes of supporting trade and developing countries.

In reflecting on the success and failures of the G20 meeting, participants at the roundtable discussion made a number of points, including:

The roundtable discussion also focussed on the causes and nature of the global economic recession.

The point was made that the historical experience of valuing and selling ‘toxic’ assets after a financial collapse reveals that such a process is time consuming and requires detailed scrutiny of contracts.  While there are some signs of confidence returning to international financial markets, it is likely that cleaning up toxic assets will take a considerable time.

There was some debate about whether the failure in financial markets was mainly caused by a fundamental miscalculation of risk, or because of poor ethical standards in major financial institutions.

In looking at global forecasts, the point was made that economic growth in China was of key relevance for New Zealand.

The point was made in the discussion that as well as the difficulties in financial and asset markets, there has also been a fundamental revision of expectations occurring in the real world economy.  After a decade long expansion, many households and firms have been expecting spectacular growth to continue.  As an example, The Economist of March 26 reported that between the end of 2006 and July 2008 shipyards received enough commissions to double the world’s fleet of cargo vessels.  The world is now being flooded with excess shipping capacity.

 

Forecasting and monitoring the impacts of the recession (16 April 2009)

Economic output in New Zealand declined in all four quarters of 2008. As of April 2009 forecasters expect the recession to deepen, driven largely by the global factors.  While the timing and extent of a recovery is very uncertain, many forecasters are picking a recovery to occur in 2010.  New Zealand’s high dependence on agricultural exports may mean that the depth of the recession is less than in countries that rely on manufactured exports.

The main transmission mechanisms of the recession in New Zealand are likely to be exports (including tourism), confidence and domestic consumption, restrictions on access to credit for some businesses, and possibly modest wealth effects.  A number of factors are however limiting the impact of the recession including expansionary fiscal policy, lower exchange and interest rates, and possibly migration.

Detailed monitoring of the economic situation suggests that there are clear regional and sectoral differences in the impacts of the recession.

There is considerable uncertainty in all forecasts, and the recent economic events have exposed a number of areas of weakness in economic models and analysis.  For example, many modern macroeconomic models do not envision credit constraints, there is a lot of uncertainty about the effects of existing and new policy instruments in the current environment, and the current changes in household balance sheets and portfolios are not very well understood. 

Unemployment is not forecast to reach the levels experienced in the late 1980s and early 1990s.  There are however a number of areas of uncertainty.  The future path of labour demand is difficult to predict.  And on the labour supply side, while the demographics suggest that the labour force will continue to grow over the next decade, the exact size of this growth depends on what happens to labour force participation and migration.

The point was made that policy needs to be based on an understanding of the dynamics of the labour market, in particular the large flows involved.  At any time, even in a recession, there are very large numbers of people both being hired and leaving jobs.

The roundtable also considered the distributional and wider social effects of the recession.  The point was made that a recession does not affect everyone equally.  Some groups may benefit during times of a recession, while other will be adversely affected.  As an example, the experience of the late 1980s and early 1990s was that while the majority of the population did not experience unemployment, a surprisingly large minority of the population did have some experience of unemployment.  There was also a smaller group who were more severely affected, for whom the recession meant persistent and repeated spells of unemployment and benefit receipt.

There is evidence in New Zealand of wide ranging social effects from unemployment and recession.  These include poverty, crime, youth suicide, and poor mental health.  There is also some evidence that such effects may persist and hamper any future recovery.

A number of groups are more at risk of being effected adversely by the recession including young people, older people, Maori and Pacific people, and those with few qualifications.

 

Policies to tackle the recession (23 April 2009)

This roundtable covered policies in a number of different areas that might usefully be deployed to tackle the recession.

A key point made during the session was that policies designed to respond to the recession tend to have both distributional as well as efficiency objectives.  In other words, policies might aim to share the costs of the recession, or they might aim to increase overall economic output.

Participants were also mindful of the extraordinary uncertainty about the future course of the economy.  It was noted that there was also uncertainty about the effects of interventions, particularly the more unusual forms that are being deployed in some other jurisdictions.  The point was made that it is important for there to be real-time learning from the experience of other countries.

There was some debate about whether short-term stabilisation policy could be effective given the expectations of economic actors.  For example, tax reductions may do little to stimulate consumption where there is an expectation of higher tax rates in the future.  This of course raises questions about what economic actors expect, and how these expectations are likely to influence their behaviour.

There were differences of views about the extent to which government should seek to moderate the economic impacts of the recession.  These differences of view were driven by different understandings of the role of economic recession on future productivity.  Some pointed to the notion of 'creative-destruction'.  It was argued that economic adversity was important to weed out the less efficient firms, and force others to innovate. Others were of the view that the recession might damage the economy's long-term growth potential.  It was argued that efficient firms still need customers, financial intermediaries and suppliers to continue operating – and a severe recession punishes both efficient as well as inefficient firms.  In addition, long-term unemployment may reduce future employability and raise long-term rates of benefit receipt.

The point was also made that New Zealand was entering a recession with a high level of social disadvantage compared to earlier decades.  Some of these areas of social weakness might be attributed to previous periods of high unemployment.

The roundtable session discussed some of the trade-offs and consequences of increasing levels of government debt.

The roundtable session canvassed the ‘Green Jobs’ agenda.  It was argued that the recent paper by Lord Stern provided a clear articulation of possible areas of investment.  The session discussed whether these investments would have benefits in terms of employment, future economic growth (perhaps green industries will be inherently more faster growing in the future), as well a the ‘decarbonisation’ of the economy.

The session also looked at the impact and possible policy responses in the youth area.  It is likely that youth unemployment, with its attendant problems, will significantly increase in the near future.  As labour market entrants, young people are disproportionately affected by a reduction in recruitment by firms.  Education and workplace training are key areas to moderate the immediate impact of the recession and encourage future productivity.

 

After the recession: what will improve New Zealand’s medium term growth and productivity prospects? (14 May 2009)

This final session looked at the future economic outlook, and the sorts of policies that will be needed to raise productivity and increase economic growth in the medium term.

While there continues to be significant uncertainty, many forecasters are picking the New Zealand economy to be growing in 2010 – although most expect unemployment to continue rising for several quarters after economic growth turns positive. Economic growth may be slow and intermittent, and crucially depends on the strength of the international economy.  There are signs of optimism already in the domestic economy due to the fall in the exchange rate in early 2009, looser monetary policy, the fiscal stimulus, and continued pockets of demand in niche markets.

The nature of future economic growth may be somewhat different, driven less by domestic household consumption, and more by exports.  It is expected that the housing market will be less of a driver of economic growth.  It is likely that ‘deleveraging’ will become a key trend as households adjust to lower wealth and lower expectations of future earnings. 

There will be implications for the labour market as different sectors of the economy grow.  For example, it is unlikely that there will be rapid employment gains in housing-related industries for a while.  Future sectoral shifts in employment require that policy balance immediate economic and social needs, without impeding medium-term economic adjustment.

Most participants were of the view that the current account deficit will remain a key issue for the New Zealand economy – although there was some concern expressed about the accuracy of the statistics because of the difficulty of measuring holdings of overseas wealth by New Zealand residents.

The session focussed particularly on the nature and consequences of the worsening fiscal position.  The fiscal outlook has deteriorated markedly – as a result of both lower revenue and higher expenditure.  Lower revenue is the result of a lower tax take because of the recession, as well as tax-rate reductions.  A key factor driving higher government expenditure over the coming years will be the increasing numbers of people receiving benefits.  Over the coming years the operating balance will be in deficit and there will be rising government debt.

For the medium term, most participants reflected on the need to improve productivity through:

There was also discussion of the need to regulate the non-tradeable domestic sector (especially the energy, transport and telecommunications industries), the question about whether we should be investing more in research and development, Maori economic development, a view that households were too insulated from risk, and whether a more concerted industrial development strategy was needed.