Finance Minister sees serious, short-term impact on economy from Covid-19. He says the Government is able to deliver more general fiscal stimulus and sector-specific help if the economic hit is longer and harder.
Finance Minister Grant Robertson has given his first comprehensive update on the economic effects expected from the coronavirus outbreaks now spreading from China to Europe, the rest of Asia and the Americas.
He saw a short and sharp impact on economic growth in the first half of 2020, but the Government was preparing to respond with more fiscal stimulus if the situation worsened to a global recession.
He said the Government was also looking at “sector-specific” help for tourism, international education and forestry if the situation worsened.
“I am going to spend a bit of time outlining what we are doing to respond to coronavirus, and how we are planning for a range of scenarios so that we are prepared and able to support the New Zealand economy as the global impact of the virus becomes clearer,” Robertson told an Auckland Chamber of Commerce luncheon briefing at an Auckland hotel.
He welcomed the fact there had not yet been a case of Covid-19 in New Zealand.
“The advice from health experts is that, with an outbreak of this type, it remains a high probability that we will have a case at some point,” he said.
Robertson said the economy was in a strong position going into the virus outbreaks.
He referred to the NZIER’s research forecasting flat GDP growth in the first quarter of 2020.
“This will have a serious impact on the New Zealand economy in the short term. It is clear that there is an immediate impact on the tourism industry, particularly given there are now very few flights between China and New Zealand,” he said, pointing out Chinese tourists typically spent around $180 million per month in the peak travel months of January through to April.
“Within education exports, our tertiary sector has been impacted due to foreign students not travelling. The estimates we have are that around 40 percent of students have not been able to travel here,” he said, adding the Government was looking at lifting the travel ban for students.
“It is obvious that if the docks in China are shut down because workers are not able to get to work, then this will impact New Zealand’s log and food exports. Although I will add that we are starting to hear reports of some shipments getting through. Chinese authorities are also prioritising food shipments into China, which is positive for a country like New Zealand,” he said.
“We also know that the supply chain disruption in China is having some effects here in New Zealand, where domestic companies rely on imports from China that are not moving at this time.”
The three scenarios
Robertson repeated comments made at a post-cabinet news conference in Wellington about having asked an advisory group to prepare a range of scenarios.
“Current analysis of the economic impacts of coronavirus from various forecasters has focused on a scenario where the virus is contained and there is a short, sharp impact on the global economy in the first half of 2020, before activity returns to normal levels,” he said.
“Scenario one predicts a temporary global demand shock where we experience a temporary but significant impact on the New Zealand economy across the first half of 2020, before growth rebounds in the second half as exports return to normal.
“The second scenario is based on a longer lasting shock to the domestic economy, as the global impact feeds through to the economy for a period of time, and where there are cases in New Zealand. The third scenario is planning for how to respond to a global downturn if the worst case plays out around the world, and we have a global pandemic.”
Robertson said the Government was not predicting the second or third scenarios.
“This week NZIER released a piece of research showing they expect a “short, sharp shock”, with the effects expected to be temporary – in line with what I’ve outlined in scenario one, where containment works,” he said. The NZIER research forecast flat GDP in the first quarter.
“But it is important to note that NZIER said that if its assumption around containment does not hold, then there would likely be a larger impact on export demand, meaning weaker GDP growth in the New Zealand economy,” he said.
“This does raise questions around whether the first scenario – that there will be a short, sharp impact over the first half of 2020 before activity returns to normal – will play out, or whether we are already heading to the second scenario where there are longer-run impacts.
“The second scenario we are planning for has the domestic economy experiencing a longer period of slower growth – across the whole of 2020 – as a result of the global effects of coronavirus. Under this scenario, global uncertainty about the worldwide spread and containment of the virus causes deeper impacts on directly exposed sectors, as our trading partners feel the effects of coronavirus.
“We would expect to experience a decline in visitor arrivals from other markets outside of the temporary travel ban due to the economic impact that the virus has in other countries – like what we’re seeing now with South Korea. These external effects lead to broader indirect impacts across the domestic economy, with business and consumer confidence falling and the subsequent impact on investment and spending decisions.”
The global pandemic recession scenario
Robertson said scenario three was one where the outbreak became a global pandemic that “in turn creates a global downturn or even a global recession”.
“In such circumstances it may be necessary to consider immediate fiscal stimulus to support the economy as a whole and businesses and individuals through this period,” he said.
“I hasten to add that we are not predicting this scenario. But we are doing the planning for it. I also remind you that these scenarios are all temporary. The effects of this virus will pass.”
He said the Government was in a strong position to handle the scenarios.
“We have low public debt. We have been running budget surpluses, and we have forecast budget surpluses because we’re managing the Government’s books carefully.”
He also expected the automatic stabilisers of a lower New Zealand dollar and a lower official cash rate to kick in if necessary.
“The Reserve Bank has noted publicly that it has room to move if the situation deteriorates – and it is worth remembering that they have greater room to move than most of their peers,” he said.
Robertson said he had asked Treasury to provide further specific policy interventions for each scenario.
“You’ve already seen examples of sector-based initiatives that we’ve been able to get under way quickly, in tourism and fisheries,” he said.
Sector initiatives for scenario two
“Further sector-specific initiatives are able to be rolled out to support businesses and New Zealanders through this period if the second scenario that we are planning for does play out,” he said.
“We are also at a stage in the 2020 Budget process where we can consider the policies required if we need a greater response.”