Following the Black Swan event of COVID19, NZ is left in a state of uncertainty while we await the response of the economy to see how the recovery will look. One thing that concerns me more than the possibility of recession caused by businesses failing to survive the lockdown, is the possibility of NZ’s economy being changed for the longer term.
Firstly, while I am the last person to support the Labour government and Jacinda Ardern, I have to say that from what I can see they’ve done a great job with COVID19. The number of cases in NZ has been easily handled, there has only been one death (which represents a very low percentage, and the person had other medical complications), and I think the financial stimulus response has been excellent (QE + Helicopter Money via the Wage Subsidy) – though I have to say that I’m not impressed with the abuse of the State of Emergency which they have used to pass irrelevant social policy, but that’s beyond the scope of this website.
The negative effect of QE and the Wage Subsidy is that the government will need to replenish their coffers once all this is over, which means increased interest rates, increasing government debt, and/or increased taxes. Each of these have their own negative implications for NZ.
The implications of increasing taxes is fairly obvious – this weakens the economy. Taxes on people reduce available income and reduce consumer demand for goods and services. Taxes on companies cause companies to make more effort to avoid taxes, such as becoming tax residents of foreign countries. Both types of tax reduce demand for goods and services, which reduces demand for labour, reduces wages, reduces demand and prices of property, which reduces consumers overall wealth and borrowing capacity, etc.
One would hope the government would only be able to do this when the economy has fully recovered and is healthy, though I expect that the idea of CGT may raise it’s head again.
Increasing Government Debt
This is also bad because it defers and compounds the problem as debt levels increase over time.
Increasing Interest Rates
This is actually the option that scares me the most. The Reserve Bank of NZ (RBNZ) could increase interest rates to recover funds back into the government coffers. This would have a direct and almost immediate effect on peoples wealth, through higher mortgage rates for property, pushing down prices and increasing costs, putting people into a negative equity situation, increasing rental costs for businesses, reducing demand for goods and services as people have reduced spending capacity, reduced borrowing capacity causing risks that weren’t previously there.
In addition to this, it could cause the value of the NZ Dollar (NZD) to increase compared to other currencies. This would be a problem for exporting companies, and cause a shift in the way NZ does business and increasing the trade surplus.
All this is a big problem because NZ relies heavily on it’s exporting industries (dairy, forestry, meat, and to some extent tourism as NZ would be more expensive to visit). New Zealanders also rely heavily on property investment, which is the staple investment for the average Joe investor (mum and dad, and many retirees).
How To Invest?
Assuming that this doesn’t cause further economic collapse, and of course assuming that this all transpires, investors might react by investing in stocks that benefit from a strong NZD, Importers, and companies with little or no debt. At the moment I’m waiting to see how the economy and government react, and building up some cash reserves so I’m ready to move when the opportunity presents itself.
Addendum (10/07/2020): Thinking about it, as things get worse, money will likely retreat to the USA, so the NZD may actually become weaker, rather than stronger. It all depends on the state of foreign countries relative to the impact on NZ, which is quite unpredictable so far out.