NZIER warns of double blow from coronavirus, drought

Tuesday, 25 February 2020

New Zealand's economy could be hit by a short, sharp shock at the start of this year, the New Zealand Institute of Economic Research (NZIER) says.

It has released its latest quarterly predictions, which forecast that the combination of coronavirus and drought is likely to be a difficult one for the New Zealand economy.

'Exporters are expected to bear the brunt of the effects, and we expect activity will be flat in the March quarter. Although we expect the effects to linger over the remainder of 2020, as they lessen over time growth should pick up from the March low,' said principal economist Christina Leung.

She said there was still uncertainty over the magnitude and likely duration of a coronavirus outbreak but by the second quarter of this year, growth should be running at 0.7 per cent again.

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'In the short-term, the uncertainty revolves around the ability of exporters to redirect their exports to other markets. Over the longer-term, the uncertainty is whether the coronavirus has any persistent negative effects on global growth.'

She said the effect on New Zealand exports could last until 2024 but the steepest decline would be felt in the March quarter and the impact would lessen over time.

'There's a lot of discussion over whether there will be growth in the June quarter but considering a lot is happening in March, for there to be further decline in activity when we are already seeing a sharp decline in exports it would take a lot for there to be another decline on top of that in June.'

Loading of logs for export to China has stopped as Chinese ports remain unstaffed due to the coronavirus outbreak.

Former BNZ and now independent economist Tony Alexander said the sense of risk would evaporate when outbreaks outside China became less frequent.

But he said interest rates would probably be cut and the New Zealand dollar would weaken.

'Wise firms will trim staff hours rather than engage in layoffs where possible because the structural shortage of employees won't go away and those sacking people risk major staffing problems when the catch-up upturn comes. Businesses need to talk with their banker sooner rather than later and all tourism-related businesses currently experiencing declining revenue should already have been in contact with their financier.'

He said the tourism decline from China would not be offset by increased numbers from elsewhere as everyone would show a preference to holiday at home until the virus had passed.

'We can only guess as to how business production will be affected by delays in supply deliveries from China, and it's a lottery as to what we consumers will first notice a shortage of. The virus effect will accentuate business sector caution.

'Business cash flows will be impeded as debtors slow repayment so that means care is needed on extending credit to buyers.'

Leung said NZIER had assumed no lasting damage to global growth, or demand for New Zealand exports.

'Developments which suggest these assumptions do not hold would likely mean a larger impact on export demand, and in turn weaker GDP growth in the New Zealand economy.

'The fundamentals for the New Zealand economy are still strong. Prior to the COVID-19 outbreak, households had been feeling more optimistic in light of the pick-up in housing market activity. Business confidence was recovering as businesses felt more positive about the Government's plans, with the announcement of $12 billion in future infrastructure spending.'