Prompt Data and Policy Responses are Crucial to protect our Economic Mirage.
Over the past decade I have often wondered what could topple our economic mirage. An economy largely based on artificially low interest rates, lots of debt and inflated house prices. This nasty virus could be a trigger. I take no delight in it. It's more a question of what is the best policy response for our fragile economy, from here. Otherwise we will all suffer.
I suspect our economy is stalling. It has been hit by an unexpected sledgehammer. Industries such as tourism, logging, farming and horticulture are reeling. The problem is that the economic statistics that show this will have a significant time lag before we truely understand what is happening to our economy. This means a further time lag in meaningful policy responses. Our politicians of most persuasions are hesitant in decisive action. This is the downside of modern liberal democracies. Likely resulting in too little , too late.
The crucial statistic is the unemployment figures. A sudden surge in unemployment would suggest our economy is heading backwards quickly .
But most importantly a surge in unemployment will start impacting on the housing market which has been the mainstay of our false economy in recent decades. A technical recession is two consecutive 3 month periods of falling output in an economy. This means the economy is shrinking, as output falls, businesses lay off staff and incomes fall. Total demand in the economy falls and Unemployment rises. This can cause a nasty downward spiral. It is called a deflationary spiral because wages and prices fall . Unfortunately debt levels remain the same. Japan has experienced a deflationary spiral for thirty years after a massive debt fueled property boom in the 1980s.
If our unemployment rates start spiking this government needs to respond quickly to prevent such a scenario. A key initiative would be to provide mortgage holidays for those made jobless by this viral crisis. If people can show their joblessness was a result of this crisis then they need to be supported in servicing their existing debts. The alternative is debt deflation which would prove very ugly for everyone, even those without debt. It's not about forgiving debt or being kind to the profligate. It's just common sense. It's about learning from history.
If someone with a large mortgage loses her job , she can't service her mortgage. She is forced to sell her house. If thousands of others are in the same situation this drives down property prices. Yet the mortgage debt remains the same.
Our Reserve bank is likely to cut interest rates again in the face of this sudden crisis. This is almost laughable when considered. Firstly they are trying to get people to borrow and spend more when jobs are disappearing and uncertainty prevails. They are also trying tio drive down the exchange rate. Unfortunately most other countries are doing likewise. They are reaching the zero percent threshold where interest rates have lost their potency to kick start the economy.
The essential economic policy response to this crisis is to fast track thr collection of important data , particularly joblessness. The government must then ensure we avoid a debt deflation trap particularly in the housing market. Accurate prompt data and smart policy responses are essential.
Peter Lyons (M.Comm) teaches scholarship-level Economics and has authored several New Zealand curriculum economic texts. His inspiration often comes after a dram of whiskey. Just one mind you. So if you're ever stuck in a room full of economists, grab the seat next to him. For a conversation peppered with wit, wisdom and weirdness.
Please subscribe to receive his next opinion piece.