All around the world, governments and individuals have dined out on debt, which is at an all-time high. With our highly exposed housing market, New Zealand won’t escape unscathed when a correction comes. By Catherine Masters.
New Zealand society was already tracking towards a greater divide between the “haves” and “have-nots” before Covid. Now, we are seeing the development of a K-shaped recovery, in which the economy takes off in different directions. Those already doing well are doing better; those not doing well are doing worse.
It is becoming evident there are different speeds of recovery at play, some experts say, with some parts of the economy thriving.
Sectors to have done very well out of the pandemic include some in the retail spend zone – think stores such as Briscoes and Bunnings – as New Zealanders went crazy buying furniture, cars, bikes and items for home improvement.
Some of that has come from the $10 billion or so Kiwis spend a year on overseas travel, which they haven’t been able to do with borders closed. Other sectors, such as tourism and hospitality, have fared much worse, and jobs in these sectors are often part-time and low-paid.
Women working in the service industries – that’s our cleaners, hotel workers, cafe workers and so forth – lost their jobs at a higher rate than men. In addition, the Government’s infrastructure spend and the construction boom tend to favour men in the workforce.
Not only that, but of people still working and who want to be working more, the underemployment rate has risen. It’s not just people in the lower socio-economic brackets who are finding their lives upended. Some in the so-called middle classes, including pilots and academics, have been hit by job losses or slashed hours and are finding it hard to pay the rent and put food on the table.
Take Claire, from the Hibiscus Coast (she didn’t want her last name used). She and her husband have had cereal for dinner at times, so the children can eat better, after her family’s world took a dive post-Covid.
Claire’s husband lost his job before Covid but was about to be re-employed. However, the job was in the hotel industry and it failed to eventuate when international tourism stopped overnight. Claire had just opened a reflexology business when the first lockdown came along and closed it.
She is still trying to re-establish herself and her husband is getting some work, but it’s unpredictable and the family live day to day.
Life has been so hard over the past year Claire wonders how she hasn’t had a breakdown. Plus, to survive, they have cleared out their KiwiSaver accounts and now have little hope of owning a home, especially as house prices have boomed around the country.
Swimming in debt
Economists use different letters to represent economic recoveries. There’s the V-shape, in which the economy tanks but recovers quickly (similar to the post-lockdown bounceback of the New Zealand economy last year) or the U-shape, in which the recovery is longer and the bottom is a bit fuzzier.
There are Ws and Ls, too, but we are now in a K-shape, says Sharon Zollner, the ANZ’s chief economist.
With a K, one arm goes up and one goes down. Another definition is, “the rich getting richer and the poor getting poorer”.
Zollner is quick to praise the country’s response to the pandemic and the Government’s steps to arrest rising unemployment and failing businesses through schemes such as the wage subsidy – we are the envy of the world in terms of our health and economic response.
But she also sees warning signs around the world that things could be heading for a fall, and if and when that happens, New Zealand will be affected.
World debt is at an all-time high. Zollner refers to a Bloomberg article with an eye-catching headline: “World’s $281 Trillion Debt Pile is Set to Rise Again in 2021” (and that’s before US President Joe Biden’s US$1.9 trillion Covid relief package was approved by the US Senate).
The story reveals the world has never been more indebted after a year of battling Covid-19 and warns of more borrowing ahead: “Governments, companies and households raised US$24 trillion last year to offset the pandemic’s economic toll, bringing the global debt to an all-time high of US$281 trillion by the end of 2020, or more than 355 per cent of global GDP, according to the Institute of International Finance.”
To put this in context, Zollner cites a graph from the Congressional Budget Office (CBO) in the US. It shows federal debt held by the public as a percentage of GDP through two world wars, the Great Depression of the 1930s, the more recent recession of the 2000s and the Covid pandemic and beyond, with the line shooting steeply upwards on into the 2040s and beyond.
The projected budget deficits would boost federal debt to 104 per cent of GDP this year and to 195 per cent by 2050, says the CBO. These projections also predate Biden’s coronavirus relief package.
Zollner says US government debt is considered the world’s risk-free asset – it’s the benchmark against which the riskiness of everything else is gauged. “Does it look risk-free to you?” she asks.
She provides another graph, but this one is hers and closer to home. It’s on New Zealand house prices relative to household incomes, which is a key measure of housing affordability. It, too, shoots towards the heavens.
Her colleague Liz Kendall, an ANZ senior economist, explains this graph: “Housing affordability has been on a worsening trend over the past few decades, but the deterioration over the past year has been extremely stark.”
Why should Kiwis care about insane world debt and spiralling house prices back home? Well, says Zollner, if you look at the extreme, the US provides a warning. “It’s an example of what can happen to your society if you allow the middle class to get hollowed out.”
In the US, there are a lot of angry people, she says. “They’re feeling like the system has let them down and they’re looking at other people doing a heck of a lot better. You can end up with a very, very divided society. I don’t know how the US is going to heal itself.”
With wealth inequality the most extreme since the 1920s, history provides some dire lessons.
“Look at what led to World War II; it was often the rise of populist politicians – fascists, basically – in a lot of countries. Often the foundation for their popularity was a very large disenfranchised section of society.”
New Zealand is eroding its middle class in a more measured “slow and gradual” way, she says, but you would have to be naive to think we aren’t developing entrenched disadvantaged groups, or that everyone has the same opportunities in life.
“Policy, and society more generally, needs to be aware of it and recognise that unless you want to have electric fences and guard towers around your property, such as in South Africa, everyone in society needs to have a fair go, or you’re going to end up in your mansion fearing for your life.”
The wealth disparity
Another definition of the K-shaped recovery is a “two-speed economy” in which there are layers of wealth. Extreme monetary stimulus – such as the record-low interest rates – drives up asset prices. Here, that’s mostly about house prices, whereas, in America, it’s largely about equities.
In either case, says Zollner, the people who own houses or own equities are the ones who are better off to start with. “Those who don’t have assets and don’t have wealth get left behind.”
Not only that, but the inflation rate is higher for those at the bottom as opposed to those at the top. Consumer Price Indexes show the spending of low-income earners is heavily dominated by housing and food, and housing has a particularly high rate of inflation both in terms of house prices and also rents.
“You can see that for those who spend on Apple watches and nice computers, they’re doing quite well. Those whose money goes on rent have experienced much higher inflation, which means less real income growth.”
The wealth disparity is starkly evident between the incomes of the top 1 per cent of salaries paid compared with workers. The Washington DC-based Economic Policy Institute reported last year that chief executives earned 230 times as much as a typical worker and, although not as extreme in New Zealand, research from the University of Otago showed chief-executive salaries here were 30 to 50 times more than the average wage.
Zollner points out one of the Government’s jobs is to try to narrow the widening income gap through the social-welfare safety net. The Working for Families package, introduced in Labour’s 2004 Budget, arrested the marked decline in income inequality – but now house prices are driving wealth inequality and that’s a tricky one for governments to handle.
“In the end, it comes back to incomes, and national incomes have taken a hit. They’ve filled the hole with debt-fuelled consumption, but, whether it’s government debt with a fiscal stimulus or private debt in the housing market, it’s still debt.”
Debt, at some point, has to be paid back, and that means this country is less well off than we were because we now have more debt. And although unemployment did not rise to the great heights many had predicted, it is expected to go up again, Zollner says.
Taking our medicine
Globally, one of the problems with the pandemic-related economic hole is that the solution, as with other crises, has been to cut interest rates. But at some point, when something else bad happens, central banks won’t be able to cut interest rates any more because the tank will be empty, Zollner says.
There may be a day of reckoning coming, though she doesn’t know when, and there is no elegant solution.
“Eventually, we’ll just have to take our medicine and it’s going to be painful and there will be a correction and maybe a bit of inflation and we’ll clear the decks and start again. I can’t think of a pretty way out of it. Basically, the world’s got too much debt. It had record-high debt before Covid happened, but now debt has exploded.”
In New Zealand, Crown debt is forecast to rise substantially in response to Covid-19, with gross debt forecast to peak at $159.7 billion (43.9 per cent of GDP) to 2024. Household debt is equivalent to 164 per cent of household disposable income, which is more than the previous peak reached during the Global Financial Crisis.
Still, although our Covid-related fiscal position is prudent, Zollner says there are many red flags in the world and there would be no question New Zealand would be affected if there was a big risk-aversion event.
At the moment, we look like “an oasis of sanity” but, although there are disadvantaged groups even in crisis-free times, Covid has exacerbated inequality. “They were pre-existing trends our nation is going to have to address and that’s particularly about housing – it’s put a rocket under that discussion, so that’s not a bad thing,” Zollner says.
In Auckland’s south, Margaret Aikman sees the pain caused by this K-shaped economic recovery – but, then again, the divide between the rich and poor is not new to the principal of a decile 1a school.
Where decile 10, generally at the top of the school scale, represents privilege, decile 1a means the children who attend these schools are among the neediest in the country. Aikman’s Takanini School students are among that group. They, and their parents and wider families and communities, have been hit hard by Covid, she says.
She sees two worlds at play, and one of them is bleak. “One world has children from families who have financial and people resources to guide and support them with their learning, but the other world is made up of parents and families who are doing the very best they can but barely scraping by.”
For many families, day-to-day survival is the focus. Her students’ parents are part of the workforce who have lost jobs or had their hours cut and, although they care about their children’s education, there are often more pressing challenges to face, such as food security and stable housing.
A lot of New Zealanders have no clue how hard it is in low-income communities, she says, and to anyone who feels like putting the blame back on those families, she urges a bit of humility. “I think Covid has shown us we are all just a step away from hard times. We have to be humble about the ability for something to go wrong in our lives and cause us to need a lot more support – we need to show compassion for those facing hard times.”
As a principal, though, the biggest disruption Covid presented was to students’ learning and achievement. The big lockdown last year, and those since, have both highlighted existing inequities in the education system and exacerbated them. Aikman’s students didn’t have devices, for example. The Ministry of Education’s rollout of devices reached only 15 students out of a roll of 420. But even if they had received them, some households don’t have an internet connection and homes are also crowded, which makes remote learning difficult.
After the first lockdown, transience increased as families moved to be with whānau for housing or because they had lost work. “They can’t afford the rent and for this reason many homes are overcrowded.”
Some students didn’t return to school while others took many months to return, and some who did return had high levels of anxiety. “We had some students who were so anxious they really needed a lot of additional support that was challenging to provide.”
Calls from the school to child-protection agency Oranga Tamariki have increased since Covid hit, too, she says.
The society Aikman sees is one that is becoming even more disparate and inequitable. There has been no reduction, for example, in children’s health issues, such as obesity, and the school clinic is diagnosing just as much strep throat, which is preventable and can lead to rheumatic fever.
“Poor health, wellbeing and achievement outcomes are correlated with poverty. An increasing number of students are being diagnosed with diabetes. It doesn’t feel as if things are improving.”
There are some small bright spots: the school provides free breakfast and the Government’s healthy school lunches programme is about to roll out. Aikman is also grateful to a philanthropist who donates to the school, recognising a healthier school means a healthier community.
Even so, Aikman says she has yet to see any real changes in child poverty.
The widening chasm
Gerard Hehir, too, says Covid has accelerated alarming trends. The national secretary of the Unite Union represents low-paid workers in hotels, casinos and cinemas, many of whom have been affected by job losses or a reduction in their working hours.
Few people in these environments had full-time work as it was, he says, adding that 30 hours a week is considered full-time in these industries.
“That’s become sort of the new default full-time, which on minimum wage [$18.90 an hour before tax] makes it incredibly difficult to make ends meet.”
Although the union fought (and won) to end zero-hour contracts – where you turn up for work but are not guaranteed any hours – the war isn’t won and Covid has affected the hours people work in a big way.
“We’re constantly coming across cafe and bar workers who are working 20 or 30 hours but have only three hours guaranteed – it’s a zero-hour contract in everything but name. What that means is where 60 to 80 per cent of the cost of a business is labour, effectively you’ve shifted 60 to 80 per cent of the risk on to your workers. But if you can just dial back on your workers, that doesn’t work for the workers because there’s rent to pay.”
There are also childcare issues thrown in, because childcare facilities struggle to cater for work hours that go up and down randomly.
Again, it’s women who are badly affected, Hehir says. “We’ve got a lot of hotel cleaners – nearly all are women – who have either lost their jobs or are now working in managed-isolation facilities. A lot would rather not do that but, hell, a job’s a job, particularly at the moment.”
And although the unemployment figures may look stronger than anticipated, Hehir says it’s underemployment that is a key issue. “Yes, people lose their jobs but the vast majority of unemployment is hours being cut.”
A chasm is opening up between the haves and have-nots, he believes, and a lot of it has to do with housing, because the high cost of buying and renting has wiped out any wage gains. “The minimum wage increase was great – that’s $30 more a week – but then our members come to us and go, ‘Yeah, but my rent went up $50 twice last year.’ That’s the killer.
“It used to be just Auckland and Wellington, but now it’s across the country. It’s a case of those who own and those who don’t. What’s particularly worrying is now we’re seeing Rotorua, Tokoroa, Bulls, Marton … You’re talking $750,000 for a standard home.”
A hell of a year
Gail Pacheco is a professor of economics from AUT’s Work Research Institute and co-wrote a report in 2019 – well before Covid threw a new chaos into the mix – about people who have work but still live in poverty.
The report, In-Work Poverty in New Zealand, was commissioned by the Human Rights Commission and found more than 50,000 working households live in poverty. Without Working for Families and the accommodation supplement, that number would be much higher.
Pacheco agrees women are being hardest hit by this downturn. “Although the latest figures from Stats NZ show that on a macro level the economy and labour market have strengthened against expectations, the underlying labour-market story for women is still concerning.”
Before Covid, the unemployment rates for men and women were about the same level, but a disparity emerged between March and June last year.
Most of the negative effects are likely to be falling on two groups – women working in industries adversely affected by the pandemic and those already more vulnerable to economic shocks – comprising largely Māori, Pasifika people, youth, sole parents and women with disabilities. It’s not just job losses but reduced hours that are hurting women, in particular.
“The underutilisation rate for women has also risen significantly over the year. It was 14.3 per cent in December compared with 11.9 per cent a year prior,” Pacheco says. “The December quarter underutilisaton rate for wāhine Māori was 22.3 per cent and for Pacific women 21.1 per cent, compared with a rate of 12.6 per cent for European women.
“This high proportion of Māori and Pacific women is consistent with pre-Covid-19; however, this gap has widened further.”
And sole parents – of whom women make up 82.4 per cent, with a high Māori and Pasifika proportion – are particularly hard hit. “Sole parents stand out as the group with the lowest levels of wellbeing across almost every measure as at September 2020. Nearly 20 per cent of sole parents reported not having enough income to meet everyday needs compared with 6 per cent of partnered parents.”
Claire, the woman from the Hibiscus Coast, says her family entered the world of wage subsidies and benefits for the first time last year, but that didn’t cover the rent and outgoings. “We just can’t look ahead,” she says. “It’s really scary. Sometimes I think, ‘Why, have we done wrong?’ It’s hard mentally and physically.”
Even with her husband getting some work, they often don’t have $20 in their pocket.
“People think, ‘We’re all right now, we’re out of lockdown’, but you’ve got to take into account not only rent but whatever outgoings you have. Even going to the doctor, you’ve got to find the money for that, so it’s less for tea than we thought we were going to have.”
You’ve got to keep smiling, Claire says, but the last year has been hell.
For Stephen Toplis, the BNZ’s head of research, the term “two-speed economy” can oversimplify matters. The thing is, he says, the economy has multiple speeds and the speeds keep changing.
People can find themselves moving into and out of different categories. Someone running an international tourism business, for example, who had leveraged themselves up to the eyeballs on the expectation the business was going to perform, could now find themselves struggling.
That’s where this recovery is different, because generally in economic downturns it’s the same people who suffer and they are the ones on the fringes of the labour market, such as part-time workers.
Because the starting point for them is lower, they are among the first to suffer.
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