Coronavirus: 'Heated' debate on health and economic tradeoffs on the way - economist

An economist is predicting a "pretty heated" debate in the coming months over New Zealand's zero-tolerance elimination strategy towards COVID-19.

It comes as another says the long-term "psychological battle with the virus" could be a drag on future economic growth, regardless of what toll it might take on our physical health. 

In its latest Monetary Policy Statement, the Reserve Bank said the "emergence of highly contagious variants of COVID-19 reduces the likelihood that New Zealand will be able to ease border restrictions in the future and be COVID-19 free". 

Issued just after the country was plunged back into alert level 4 with the appearance of the Delta strain in the community, the statement said it would "lead to ongoing and challenging trade-offs between public health, economic outcomes, and mobility" which Kiwis might not be prepared for, considering we've "not experienced a sustained period of community transmission of COVID-19" like other countries. 

Economist Cameron Bagrie told The AM Show on Tuesday this means to expect lower economic growth in the coming years.

"There are some obvious reasons for that - obviously labour supply, migration's not going to go back to where it was. In a post-COVID world, if you're managing risks, well managing risks costs. That's going to come in the productivity side of the channel."

New Zealand's economy recovered unexpectedly well after eliminating the virus last year, and there's been widespread agreement amongst economists and health experts that elimination has been the best strategy for both health and the economy.

But Delta is a lot more infectious than the original strain and is now dominant worldwide, leading to suggestions it might never be eradicated.

The Government has signalled a phased reopening early next year, after everyone in the country eligible to receive a vaccine has had that chance. It's not clear yet whether the current vaccines are good enough to give the vulnerable the protection of herd immunity against Delta, but modelling has suggested they aren't, and boosters or new vaccines might be required. 

"We don't know exactly what that post-COVID environment is going to look like," said Bagrie. "What we do know is it's pretty clear the elimination style strategy is not the endgame. We're going to have to learn to manage risk, and that's where vaccination is pretty key… We're going to end up at some stage in the next 12 to 24 months getting into that debate, which I think's going to end up being pretty heated in regards to trade-offs between the economy, health and mobility."

Cameron Bagrie.
Cameron Bagrie. Photo credit: The AM Show

Robert MacCulloch, professor of macroeconomics at the University of Auckland, said the ongoing uncertainty is likely to have a long-term impact on the economy, even if New Zealand manages to avoid the kinds of death and misery seen overseas.

"I tend to agree with a lot of other commentators and the Minister of Finance, who said this temporary shock can be dealt with by schemes like the wage subsidy. The Government is however going to borrow more to cover the cost of those schemes. Provided it's a few more days, a few more weeks, even a month, that could be easily dealt with," he told Newshub.

"However the looming problem is not so much the next few days or weeks, but how it's going to play out over the next few years, the longer-term. I think... we could be in almost a psychological battle with the virus to the extent it may break people's spirits, people just feel worn down by it, even depressed by it all. We know that can have devastating long-term effects on the economy. So that's the worry - the long-term, not the short-term." 

He said there is a "proven link to people's mood and sentiment and optimism, as to how much they spend", and no economist can predict people's moods and mental health in advance.

"We were hoping that it would be a temporary shock... last year everyone was hoping it would just be six months or a year. But now it's coming up two years. What was looking like a temporary shock is looking like becoming a more permanent state of affairs. 

"That's dawning on all of us - it's sinking in that this is not just a temporary thing, and I think that's got a lot of us quite worried and upset that this could just go on and on. I think there is a danger that our state of mind could shift, and that's the biggest risk."

Bagrie said while interest rates remained on track for rising, it might come later rather than sooner if Auckland spent four or more weeks in lockdown. 

"We've got some pretty strong inflation pressure… all the economic signals are telling the Reserve Bank to get interest rates up sooner or later."