What’s In Store for the NZ Economy as Coronavirus Fever Heats Up Worldwide?

The rapidly evolving COVID-19 situation is sending instant shockwaves through world economies and health systems and the fallout will have longer term impacts on the New Zealand economy and housing market. 

We look at the situation thus far and analyse the key impacts and the response.

COVID-19 has hit the global system with a sledge hammer, we analyse the fallout and New Zealand's response and how it will impact our housing market.


The Situation 

It’s official: the World Health Organization has classified the coronavirus outbreak as a pandemic. 

News headlines in recent weeks have become increasingly alarmist and government responses Worldwide have increased in extremity including travel bans, border restrictions, school closures and event cancellations. Many parts of the world are in virtual lockdown. Share markets and global commodity prices have experienced tremendous volatility, mainly downward.  

Most commentators now see a major global recession is inevitable and local major bank economists have been hurriedly downgrading growth forecasts towards negative numbers. 

Initially the pain in New Zealand was felt in tourism, export education, certain service industries, as well as forestry and some food exports. However, as analysts warned the impacts are being more widely felt and will spread to all sectors of the economy. 

Central banks have made emergency cuts with the Reserve Bank cutting the OCR to 0.25% for a year which followed similar action by the US Federal Reserve and the Reserve Bank of Australia. 

The government has made it clear that the economy faces a ‘serious impact’ from the coronavirus pandemic. 

The government's $12.2 billion economic support package is designed to provide a buffer for the economy and the worst-affected industries. At 4% of GDP, this package is unparalleled in modern times. And the government has hinted there could be more to follow.

Given the event is unprecedented in modern times with its global scale and volatile, fast-moving nature, the questions must be, will these measures be enough? 

 

The Impacts

Share markets and business confidence are now at their lowest levels since the GFC and peoples investments including KiwiSaver have taken a hammering. This has impacted many who were looking to use their KiwiSaver as a deposit for their first home. 

House prices which had been predicted to rise strongly this year are now forecast to ease over the next two quarters with ASB predicting a 0.5% drop this quarter followed by a 1% drop next quarter, however some economists are predicting a larger drop. 

Despite some panic buying, most businesses are suffering sharp drops in sales revenue and the tourism sector has suffered cancellations on mass. 

Exports have taken a hit as the crisis is impacting supply chains as well as global demand for some products. 

NZ is heavily reliant on imported goods, especially from China, meaning supply chain interruptions due to drastic containment measures taken by the Chinese authorities have been felt by some businesses domestically. The panic buying of supplies of paracetamol is a case in point. Shifting to different suppliers is not easy, especially when there’s global competition for the same alternatives. 

More alarming perhaps is the prediction that unemployment is likely to go up significantly as a direct result of the crisis in the most-affected industries. Areas heavily dependent on tourism such as Queenstown, Nelson-Tasman and Rotorua will be hit hardest. However, the scale of the fall-out means we’re likely to see job losses across the board, from retail through to hospitality. 

The Response

Central banks have been at the forefront of the response financially, loosening monetary policy in an attempt to buffer the economy from some of the impacts. The drastic OCR cut has been passed onto both fixed and floating rates with record low interest across the board. 

Banks rely on deposit rates to fund the majority of lending with limits on the foreign capital they can lend out, so these low interest rates are also a double edged sword and there will be pressure on funding in some sectors as has already been the case in agribusiness and property development.  

The government has stepped in strongly with an economic support package which will be used to provide wage subsidies for impacted businesses. Eligible full-time staff will receive $585 per week. In addition, support is on offer for workers in Covid-19 leave or self-isolation and they have also made some tax concessions for businesses which should help with cash flow.  

These measures, along with reduced prices at the petrol pumps, are good news and will ease the pressure on some businesses. 

However, strict travel and movement restrictions such as the ban on large gatherings, the cancellation of events and sporting fixtures plus the new norm of social distancing means Kiwis are spending far more time at home. The subsequent drop off in consumer behavior and economic output see NZ heading towards a recession.  

One thing for sure is that the impact of the COVID-19 pandemic will not be going away any time soon. The government is preparing for 12 months of turmoil while some analysts are predicting the recession could go on for two years or even longer. 

Brace yourself and hold on tight! It’s going to be a bumpy ride and things will change rapidly. Even since the time of this going to print, new information may have come to hand so if you're in doubt please get in touch and I can help you work through any scenarios you might need help with for customers and clients.