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last updated 18/02/2020

When China sneezes – economic overview

last updated 18/02/2020

19 February 2020 – The latest Quarterly Economic Overview from Westpac suggests that the Coronavirus outbreak has the potential to throw the New Zealand economy off its stride

Westpac's guide to the economy in six charts from the February Overview

As the first group of evacuees from Wuhan prepare to leave their quarantine quarters just up the road from Franchise New Zealand’s offices in Whangaparāoa, no cases of the virus have been reported there (or indeed anywhere else in the country). However, it appears our economy may not be so fortunate.

In the latest Quarterly Economic Overview, Westpac Chief Economist Dominick Stephens writes, ‘As the new decade dawned the New Zealand economy was on an improving trajectory. Our controversial call that the housing market would pick up has panned out. Government spending has also padded household wallets. The result has been a boost to consumer spending and GDP growth. However, this is more of a sugar-rush than lasting nutrition. Rising house prices and government spending prop things up in the short run, but won’t necessarily do anything for our long-run prosperity.’

‘The recent Coronavirus outbreak has the potential to throw the economy off its stride. China has grown to become a dominant economic force, and to borrow a phrase, when China sneezes the rest of the world catches a cold. This Economic Overview is based on a scenario where travel and trade are disrupted for a couple of months, in which case the economy would take a serious hit for one quarter but would rebound quickly. But the longer the quarantine efforts persist, the greater the chance of lasting economic damage.’

‘The scenario underlying our forecasts is that Coronavirus-related disruptions will last just a few months. But that’s still enough to reduce our forecast of March quarter GDP from 0.7% to 0.1%. As economic activity returns to normal, GDP growth later this year will be higher than otherwise. There could even be a period of stronger-than-usual catch up demand in sectors like forestry as Chinese factories work overtime to address shortages of finished goods.’

‘The big uncertainty is how long the quarantine efforts last. The longer they go on, the greater the likelihood of firms running out of cash and folding, in which case there could be more lasting economic damage.’

‘Although the consumer side of the economy is improving, businesses remain pretty downbeat. Firms are being squeezed between competitive pressures fuelled by rapid technological change and rising costs associated with being a good corporate citizen and complying with regulations. Neither trend is going away soon, so business investment will remain lacklustre.’

‘Inflation has risen recently, but we expect it will soon drop back again. That is one reason that we are forecasting an OCR cut later in the year. The other is that we expect foreign central banks will be reducing their rates due to ongoing sogginess in the global economy. On the world stage we do expect New Zealand will be an economic outperformer, which is why we are forecasting the exchange rate to trend higher from here.’

The Overview looks at impacts on the economy of possible election outcomes, noting that ‘the further left the government, the more stimulatory government spending will be. Dollar-for-dollar, social spending has more impact on short-run economic activity than tax cuts.’ However, it also comments, ‘the further right the government, the higher business confidence would be after the election.’

Low business confidence despite an improving economy is a major theme. In a Special Topic, the Westpac team takes a closer look at some of the pressures on firms, from the rising cost of complying with regulations and being a good corporate citizen, to the new technologies that are keeping product margins wafer-thin, and comments, ‘these pressures are not going away any time soon. Firms that are unable to adapt will fail, while those that are best able to leverage off new technologies will thrive.’

Download the latest Westpac Quarterly Economic Overview here

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