Hoping for some immunity

  • The NZ economy was showing signs that it was turning up heading into the New Year.
  • Coronavirus will cause a sharp and - we hope - short jolt to the economy in the first half of the year.
  • Both the RBNZ and the Government are well placed to provide support if the outbreak has prolonged impacts.

Things were starting to look up heading into the New Year for businesses, households and Government alike. A warm summer beckoned, along with a gradual lift in economic growth back to a respectable pace, however Coronavirus has turned this on its head according to the latest ASB Quarterly Economic Forecast.

Avoidance behaviour and China's extreme isolation measures are both markedly affecting China's economy and global ramifications are growing. 

The most evident impacts for New Zealand are the entry bans for NZ non-residents that have come from or transited through China. February and March are when nearly a quarter of our annual visitors from China come and normally spend about $400 million.  Forestry and seafood are other sectors feeling abrupt drops in demand.

"The impact of viral outbreaks tends to be sharp but also short. We see economic growth grinding to a halt in early 2020 but rebounding over the second half of the year. Only time will tell if the 'short' part of that assumption is right," says ASB chief economist Nick Tuffley.

"People need to keep calm and carry on. We tend to be overly cautious around new and ill-understood risks, which is what this virus is.

"The disruption from the virus will eventually settle. That will be an opportune time to review our development contingency planning for a range of business risks, and consider the benefit and costs of diversifying export markets and suppliers," says Tuffley.

COVID-19 watch: Potential volatility ahead

The COVID-19 coronavirus represents a dark cloud on the domestic and global outlook. Viral outbreaks typically result in a sharp, but relatively brief, shock to both the local and global economies.  Outcomes are highly sensitive to the location, severity and duration of the outbreak and measures taken to control it.  What makes this outbreak more important is that the epicentre, China, is both the growth engine for the global economy and New Zealand's largest trading partner.

Already there are signs of a larger proportionate hit to global tourism from the virus. Economic impacts are also occurring because of the extensive (and disruptive) efforts to contain the virus, which are impeding exports and imports.

So far, the COVID-19 coronavirus has not been confirmed in New Zealand, meaning the economic impacts of the outbreak are likely to be more prevalent for trade-exposed sectors and will likely be uneven across different sectors.

"The actual impact on the NZ economy is inherently uncertain and will depend on the scale and persistence of disruptions it causes. All up, we have pencilled in 0.6% hit to Q1 NZ GDP relative to our baseline, primarily via lower services exports," says Tuffley.

International Outlook - Coronavirus nips global and domestic growth green shoots in the bud

The global economy had been turning a corner, but now it may get worse before it gets better again.

"We expect the global green shoots to return by the second half of 2020. Nonetheless, the global economy is more reliant than ever on Chinese demand and its economic growth. With that in mind, the risk is that the global slump may persist through the calendar 2020 year," says Tuffley.

An outcome for the US-China trade deal as well as the long-debated Brexit headlined the global growth green shoots earlier in the year, however Coronavirus has brought this to a premature end.

Looking specifically at New Zealand, economic growth decelerated over 2019, although this started to pick up again in the last few months of the year, with business confidence measures stabilising.

"Prior to the outbreak of Covid-19 we had expected economic growth to gradually accelerate over 2020 as the impact of lower interest rates stimulated the economy. We hope (optimistically) that the disruption is reasonably short lived, and the economy quickly returns to business as usual," says Tuffley.

Interest Rates and Exchange Rates - Short-term pain, long-term gain

The ASB Quarterly Economic Forecast shows ASB Economists have changed their OCR predictions and no longer expect a 25bp cut for 2020. 

"This is based on the conviction that the NZ economy remains reasonably well placed and the most likely course at present is for the OCR to remain at 1.00%," says Tuffley.

"We remain sceptical that the New Zealand economy will accelerate to the degree that the RBNZ expects. Our forecasts are consistent with a period of stability in wholesale interest (swap) rates over 2020, before a gradual trend higher kicks in through 2021 and 2022. We also expect rate policy interest rate cuts by other central banks over 2020.

"The NZD has tended to underperform so far in 2020 and the near-term NZD outlook remains highly contingent on the spread and impact of the coronavirus which is, of course, highly uncertain," says Tuffley.

The latest ASB Quarterly Economic Forecast will be available online at https://www.asb.co.nz/documents/economic-research/quarterly-economic-forecasts.html

Other recent ASB reports covering a range of commentary can be accessed at our ASB Economic Insights page: https://www.asb.co.nz/documents/economic-insights.html

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