On 28 February, the first case of COVID-19 was confirmed in New Zealand, resulting in a weekend of panic buying as many people prepared for the worst.
In the wake of COVID-19 making landfall here, nearly 150 people with suspected symptoms were tested locally. Business confidence has slipped further and banks are coalescing around further OCR cuts – just when we thought rates wouldn’t go any lower.
COVID-19 has gone from ‘something overseas’ to a very real issue on our own shores.
The near-term impact of the virus negatively affects New Zealand’s exports
The effects are both economic and human, and they are interlinked. Three of our biggest export earners – tourism, agriculture and international education – are feeling the strangling effect of COVID-19, as the movement of people and goods ceases.
The Government has already announced an $11 million stimulus package for tourism, an industry which has abruptly seen its flow of high-spending Chinese visitors dry up. Likewise, universities, polytechs, private training establishments and schools with international student programmes are starting the year with emptier classrooms – and pockets.
Both forestry and high-end seafood exports from New Zealand are key examples of the emerging impact. In total, exports for forestry products to China were down by about 30%, and seafood exports down by 60%. With fewer exports and imports, road freight movements are dropping.
Without knowing exactly where the end point for COVID-19 will be, or how deeply its impact will be felt, we do know where it might go.
The disruption of the virus outbreak and anticipated ripple effects are unlikely to fade
New Zealand’s economy is in good shape – for now. Increased Government spending, low interest rates, and current strong employment figures are expected to support the economy over 2020. New Zealand also faces a compelling rate of economic expansion compared with many other developed economies. There is a consensus view that domestic GDP growth is unlikely to strengthen in Q1.
In terms of the economic outlook, Treasury is assessing the impact of COVID-19 under three scenarios:
Scenario 1: '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.'
Scenario 2: '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 there are cases in New Zealand.'
Scenario 3: '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.’
Our view is that the second scenario is more plausible. The disruption caused by COVID-19 is likely to linger, and shocks may mean:
- The weakness in agriculture, tourism and international education will dampen economic activity in regions reliant on these industries. Reduced activities may have spillover effects on other sectors.
- New Zealanders’ incomes may take a hit from lower food export prices, reduced tourism, and other business revenue, which will have a knock-on effect on household spending later in the year.
- There will be fewer imports from China, and potentially from other key trading partners. Fewer goods may create inventory challenges in the domestic market, especially since New Zealand relies on China for a large amount of intermediate goods, such as steel, plastics, and pharmaceutical inputs. This decrease in imports will have flow-on effects for logistics, construction, and retail industries.
- Reduced labour market activity and people movements.
- A potential change in how we live our lives. If COVID-19 spreads, it may affect how we approach work, childcare, shopping and travelling.
China is a significant producer of electronics, mobile phones and raw materials. Major retailers, including Noel Leeming and The Warehouse, are keeping a weather eye on their supply chains as delays deepen. With winter approaching in New Zealand, warm clothes and fabric, for example, might be more difficult to source.
Some questions to consider
What are the two factors that could influence the extent of the problem?
The world is a different place now compared to 2003 when SARS hit – and New Zealand’s economic profile is quite different. We have much closer links with China. In 2003, trade with China was about 5 percent of New Zealand’s total trade, but today it’s 20 percent.
In our view, the impact of the virus outbreak will be influenced by:
- How effectively the outbreak is contained.
- How the Chinese government can address the massive labour shortage to combat the global slow-down.
The Chinese New Year is the largest migration of humans on earth, where most workers head home to celebrate with family. This year, China’s railways expected about 440 million trips during the 40-day official travel season. In January 2020, the Chinese government stopped travel because of the virus outbreak. At this point, the majority of workers had yet to return from their homes in China. In February 2020, the Chinese government declared that businesses should open again. However, according to Deloitte’s Chief Economist in China, Tao Xu Si, the average national return-to-work ratio hovered around 26 percent by mid-February 2020. People not returning to work has resulted in a massive labour shortage in China.
We are now seeing data from China that shows what its broader business and society shutdown amounts to in terms of economic impact. China’s National Bureau of Statistics reported that its purchasing manager’s index (PMI) for manufacturing fell sharply from 50.0 in January to 35.7 in February, a record low. This is an even deeper decline in activity than took place during the 2008 Global Financial Crisis (GFC).
Will the shock of the outbreak be severe enough to push the global economy into a recession?
There were warnings of looming global recession in 2019, including trade wars, currency gyrations, uncertainty around Brexit and weaker growth in both advanced and developing countries.
The share markets have seen a significant drop. Financial markets have reacted strongly with S&P tumbling 15 percent in the last week of February 2020. Crude oil prices plummeted 6 percent on 28 February 2020, underscoring uncertainty. This was the worst week since the 2008 GFC.
Business confidence is now fragile. According to the ANZ Bank survey, pessimism among New Zealand businesses grew in late February 2020 as the outbreak caused widespread alarm about the economic outlook.
Insights from Canada and China
So could the virus be the additional factor that could push us to a global recession? Deloitte’s Chief Economists in Canada and China have offered their thoughts:
Craig Alexander, Chief Economist in Canada: The real question is whether consumer confidence will decline in the wake of the flu pandemic news and the headlines from financial market volatility. So long as consumers continue to spend and the services industries grow, a recession should be avoided. At this point, it still looks like we are headed for a global economic slowdown, but the recession risks have certainly increased and certain sectors are particularly vulnerable.
It is likely that the disruption to China will be significant in Q1. Deloitte’s Chief Economist in China, Tao Xu Si expects a plausible GDP growth for China in 2020 will be 5.3 percent to 5.5 percent:
In December 2019, our forecast on China's GDP growth in 2020 was 5.8%, a shade lower than 6%, the implicit official growth target. Coronavirus clearly has changed both the forecast and policy mix. The economy was immediately hit by contracting activities related to transportation and hospitality sectors. Most SMEs, especially those with thin margins and high fixed cost, are feeling a severe pinch. If the Government could sustain its measures which are aimed at containing the virus at the cost of economic activity, normality could slowly resume by Q2.
Based on our observations, the Government has continued to ratchet up these measures. For example, people movements are being tracked simultaneously by both employers and local communities. If the number of confirmed infections starts to peak, calm will slowly take hold. So far, the fatality rate of coronavirus is relatively low and even much lower among the young, suggesting older people with pre-existing vulnerabilities have been much more affected. Assuming containment measures are effective, with a decline of those who are being affected, the impact on corporate investment is likely to be insignificant. That said, consumption and trade will certainly take a hit in Q1. However, desperate times call for desperate measures, as the saying goes. We will expect policymakers to come up with a slew of policies including fiscal relief. Again, the comparative advantages of China's governance model – with swift executions of the central government's policies – will be on full display.
Based on our baseline scenario which could be summed up as a sharp slowdown of consumption in Q1, spillover effects will be mainly seen in the economies which have either close links with China or strong dependency on Chinese tourism. However, even for these two economies, the impact is expected to be transitory. For example, if China's steel sector had not held up in recent years, it would have been unthinkable for iron ore prices to reach to the current elevated levels. Again, in our baseline scenario, damage will be on transportation and hospitality-related activities, not in the manufacturing sector unless the Government fails to contain the outbreak. In conclusion, the epidemic, whose duration remains difficult to predict, has prompted us to revisit our key forecasts of the Chinese economy. So far, revisions in the market on GDP growth range from 0.1% to 1.2%. We are more sanguine and seeing a different growth trajectory (bad Q1, flat Q2 and V-shaped recovery in 2H). As such, estimated GDP growth of 5.3 to 5.5% is a more plausible scenario.
The content of this article is accurate as at 4 March 2020, the time of publication. This article does not constitute advice; if you wish to understand the potential implications of current events for your business or organisation, please get in touch. Alternatively, our COVID-19 webpages provide information about our services and provide contacts for relevant experts who can help you navigate this quickly evolving situation.
Deloitte Partner, Jane Fraser-Jones, shared her planning recommendations for businesses around COVID-19 for the Weekend Herald. Read it here [paywall].