Thursday, March 12, 2020

Frank Newman: Keep calm, and think of Tāne Mahuta

The Governor of the Reserve Bank is suggesting people remain calm in the face of the Covid-19 pandemic. He said the NZ economy is in a "wonderful starting position" to face a "horrible situation".

For me, the Governor's "Don't panic" message has a tinge of Lance Corporal Jack Jones from Dad's Amy about it.

Its times like this when one appreciates the conventional, bland, vanilla type of bank governor that were his predecessors - the type who has a low profile and only says something when they have something worthwhile to say. The result was those words carried a certain amount of gravitas.

I wonder if Mr Orr's keep calm message will have less impact because of a rather colourful and unconventional start to his term as Governor.

Economist Cameron Bagrie has said people were starting to talk about Orr more than the Reserve Bank itself. Part of the eye-brow raising has been due to the Governor's aggressive 0.5% cut to the OCR in August last year. Part is due to the slanging match he has engaged in - an email duel with some of his critics. And part is due to his rather elaborate and imaginative analogy comparing the Reserve Bank to the eco-system of Tāne Mahuta, the giant kauri tree. I think its fair to say that most money-centric people are actually a little more grounded in their views and reacted with a "that's pretty weird", as I did, when I heard the tree analogy commentary.

In truth, the Tāne Mahuta comments can be dismissed as PC nonsense, but perception is important, and more so when that perception is of the leader of a country's central bank. My perception is such that when the Governor of the Reserve Bank says don't panic, I salute and say "yes, sir, Corporal Jones".

My inclination is to favour the view of other economists, like those at the BNZ when they say a recession is now probable, and we shouldn't expect the Government to be able to do anything to turn it around.

The sudden decline of sharemarkets everywhere is perhaps the best pointer to the flow-on financial impacts of Covid-19. Whether the mania is justified or not is academic (and when supermarket shoppers come to blows over toilet papers one cannot help but conclude the response has become irrational) the effects are real. Business profits will be affected, so the value of the businesses will be worth less (given their value is nothing more than the discounted value of their future income streams). That's why companies like Boeing have fallen in value by 40%.

The optimistic scenario is that the lower profits will be short-term (no more than a year). The issue for the most vulnerable companies will be whether they can remain viable until the crisis passes.

My take on it is the Governor's don’t panic message is the correct stance for consumers, but I doubt anyone is taking much notice. Businesses will have to do what they always do - adapt to survive and plan to thrive.

Frank Newman, a writer and investment analyst, is a former local body councillor.

No comments: