The Covid-19 pandemic has upended consumption patterns for goods and services, with unpredictable lockdowns delivering huge swings in demand from consumers. At the same time, the supply of both goods and labour is experiencing pandemic-driven dislocations. Businesses, caught in the middle, are challenged with finding the flexibility to deal with these changes. Throw in the added disruption of work from home and business managers are likely facing the biggest test of their careers.

As New Zealand faces a stringent lockdown of uncertain duration, what new challenges are businesses facing and what can we say about how well the business sector can weather this period?

Despite the renewed uncertainty that this latest hard lockdown brings, there are plenty of reasons for optimism.

Going into this lockdown, the economy was barrelling along. Second quarter retail sales accelerated to 3.3% above the previous quarter. This is bolstered by evidence from companies such as Briscoes who have seen sales growth of over 20% in the second quarter compared to the same period in 2019.

Freightways, too, saw revenue growth from express package deliveries increase by 10% in the 6 weeks before lockdown. Whichever way you look at it, Kiwi consumers were in the midst of a spending spree and confidence was high.

Level four lockdowns represent a brick wall for that demand, as consumption is in many cases physically impossible in this vastly changed – though temporary – environment. This will be felt hardest by service and particularly hospitality industries and for some of course this will unfortunately be the final nail in the proverbial coffin.

Across the broad range of industries though, there is continued cause for optimism. Businesses have seen this situation before, and this time round the transition to WFH will have been relatively seamless. In April 2020, by contrast, the globe was plunging into recession, but sixteen months on global growth is very strong, meaning New Zealand exporters are in better shape.

One area where we may see less flexibility for businesses is the labour market. For labour-intensive industries facing a drop in demand the key response is to cut jobs. But with unemployment registering just 4% in the second quarter, the recent story is one of labour shortages.

If businesses bet on a short lockdown, and worry they will have staffing issues once demand returns, they are much less likely to quickly cut jobs. This looks to be the experience in Australia where despite a nine-week lockdown in Sydney there has only been modest rises in unemployment.

In addition, many of the hardest-hit industries (e.g. tourism) will have already slimmed down in response to the new environment. That’s good news for the labour market, unemployment is unlikely to increase in the short run and there will be little economic scarring from the lockdown. The flip side is that businesses may bear the brunt of these elevated labour costs.

The wage subsidy is available to businesses to mitigate some of these costs. However, there is likely to be reticence from businesses to accept the subsidy. The subsidy will be a lifeline for many smaller operators, but for larger businesses the social stigma of taking handouts after a period of strong profitability will be a hurdle. Indeed, finance minister Grant Robertson confirmed that only one business with over 500 employees had thus far applied for the subsidy. This is another stark contrast with the onset of the pandemic in the autumn of 2020.

The recent strength in the economy has stretched many supply chains. This has depleted supplies of goods, particularly construction materials. Whilst a snap lockdown is not good news, one potential silver lining is respite for some companies to rebuild supplies of raw material inputs. This assumes of course that companies are able to do so under the current restrictions.

The net result for businesses is obviously predicated on the unknowable length of this lockdown. But we know from both local and global experience that demand comes roaring back once lockdowns are ended.

Given recent strength, a lockdown of four to six weeks is likely to see our economy simply pick up from where it left off. However, a more protracted lockdown will incrementally tighten the ratchet on the domestic economy.

Strong recent profitability has allowed businesses to build some strength into balance sheets. This buys some time but if labour costs remain elevated then this cash pile will be quickly eroded. At that point, businesses will have no choice but to cut staff, negatively impacting the longer-term outlook and forcing a deeper policy response from the government.

Company managements, alongside everyone else, will be watching the daily number of Delta cases with interest. The best-case scenario for business remains that the elimination strategy is successful, and in short order. The clock is ticking.