DIGGING DEEP
We are heading into a fragile economic recovery, as Covid vaccinations reach the community and travel opens up again. Yet we have never seen such a worldwide shutdown before, and consequently we don’t quite know how it will open, except that the global recovery will surely surprise and disappoint. After a year of record economic contraction, we are now seeing some record positive growth rates. Generally – both in this country and overseas – the lockdowns and border closures have resulted in less damage than feared. Most economists have revised their forecasts upwards, but it will take a couple of years to restore our country’s growth path. We are significantly poorer than we would have been without Covid.
New Zealand moved fast to contain the pandemic and cushion the economic effects. As with many countries, we poured money into job subsidies and business support. Now, many countries are looking to continued ongoing stimulus to support the recovery.
But this will not be straightforward. Paying subsidies during lockdown represents classic Keynesian stabilisation during a downturn. Pumping public money into the economy during some of the strongest growth quarters in our history is procyclical and risks overheating a tight economy. At the moment, with very low inflation, that looks to be a low risk, but it will be some time before we can be sure.
Infrastructure investment is cool again … but we are significantly poorer than we would have been without Covid.
A number of Western governments have selected infrastructure as a target for stimulus. After all, US president Franklin Roosevelt did this successfully with the New Deal during the Great Depression (1929 to the late 30s) and president Dwight Eisenhower used federal spending to build the US interstate highway system during the 1950s Cold War. President Joe Biden is currently asking Congress to approve the world’s biggest single infrastructure spending programme. Infrastructure investment is cool again, and many Western countries realise they have not had enough of it in the past.
But when we look closer, it all becomes more complete. The world
