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Qualifications and a Milder Pandemic

The impact of the severe scenario will be larger if the recovery takes longer. The speed of the recovery generated by NZTM is largely driven by increased investment due to low interest rates following the initial shock. It is possible that this response may not occur as strongly as in the NZTM model. Investment confidence may be weakened due to the pandemic itself, and the pandemic may also result in reductions in wealth if financial or housing markets were to falter. NZTM also assumes that demand from the rest of the world for our exports eventually returns to normal, which may not be the case. All of these effects potentially worsen the impact of a pandemic and could significantly lengthen the time required for the economy to recover.

On the other hand, because a pandemic is inherently a temporary shock, the economy may recovery much more quickly than we have assumed. Consumers may simply delay spending during a pandemic, meaning reduced economic output during the pandemic but a speedy recovery when the pandemic is over. The same may be true of investment decisions.

The NZTM recovery path assumes that at the onset of the pandemic the public debt target constraint is eased and public debt rises rapidly as the pandemic takes hold. It seems unlikely that a government would raise taxes during a pandemic to keep the debt level on target. However, a permanent increase in the debt level would be unsustainable and would be expected to have an adverse effect on the economy in the recovery phase or in the longer term.

The timeframe of the pandemic will also be crucial to the direct impact and the recovery. We have assumed that the pandemic shock occurs during one quarter only. There is potential for the shock to be felt over a much longer period, especially if a pandemic occurs in the rest of the world significantly before New Zealand, or if cases of pandemic influenza occur in New Zealand significantly before the major outbreak. In both these cases confidence of both businesses and consumers will be adversely affected before the pandemic takes hold. Multiple infection waves could also extend and accentuate the impact.

Higher levels of “social distancing” will lead to a larger short-term effect, but may reduce long-term impacts.

In our rough estimation of the initial shock to the economy we have included some effects of “social distancing”, where we expect industries that require a lot of social interaction will be badly hit. However we have not taken into account how this “social distancing” will affect the infection rates of the pandemic. Presumably the higher the level of “social distancing” that occurs in society, the lower the rate of infection and spread of disease. A lower level of infection will lead to a lower death rate and a smaller long term effect on the economy. At the same time, a higher level of “social distancing” will create a bigger initial shock to the economy. There is potentially a trade-off between the size of the initial shock and the long run effect. We have not investigated this here, instead assuming that the infection rate remains the same despite the extent to which industries close down and people adopt “social distancing”. The primary reason for this is that we have found little information about the effect “social distancing” would have on the gross infection rate.

The severe scenario we have presented above assumes that 80% of the workforce is away at some stage and for a considerable period of three weeks. In the event of a milder pandemic, where death rates are lower and mainly in the already ill or frail, the effect on the labour supply and on consumer demand could be much less. In a milder pandemic we could expect the level of absenteeism to be lower and that people would take a shorter time off work.

A pandemic with an infection rate of 30% and 0.25% case fatality would have a mortality rate of the same order of magnitude of the 1958 and 1967 pandemics. If we repeat the estimation above for a pandemic of this magnitude with no additional absenteeism, and only one week of work off on average, the reduced labour supply would reduce GDP by 0.7% for the first year. If we include demand effects and industry close down rates a quarter of those used in cases B through D above, we estimate GDP would be reduced by 0.7 to 2.1% in the first year and after four years the cumulative reduction would be 1.1 to 2.8% of one year’s GDP.

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