ASB forecasts NZ economy will decline, but interest rate cut may not be a cure
Monday, 10 February 2020
The New Zealand economy is likely to shrink in the first quarter of this year as the coronavirus outbreak cuts into tourism and agricultural exports, one of the country's biggest banks has predicted.
In what appears the glummest economic forecast on the impact of the virus to date, ASB said it expected the country's GDP would decline 0.1 per cent in the three months to the end of March, which reverses its previous forecast of 0.5 per cent growth.
The 0.6 per cent downgrade suggests the coronavirus could have taken a $1.8 billion bite out of the economy by the end of next month.
'People acknowledge now there will be a short term impact from the coronavirus on the economy,' ASB senior economist Mark Smith said.
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'But really the key focus will be how enduring that impact is going to be.'
ASB was assuming 'things will come back reasonably quickly'.
'But really the risk is clearly it having a more prolonged impact,' Smith said.
That was possible if there was an outbreak in New Zealand, or if the virus continued to become more widespread overseas, he said.
BNZ has downgraded its GDP growth forecast from 1.1 per cent over the first six months of this year to 0.6 per cent, but is still predicting 0.4 per cent GDP growth in the first quarter, forecasting the impact of the coronavirus may be more 'spread out'.
'Yes, the coronavirus impacts could yet dent first-quarter GDP growth by more than we figure,' research head Stephen Toplis said.
'But then there is also the potential for the weather to not crimp first-quarter GDP as much as we reckon – thinking about meat processing especially – which could then cause more of a hangover for the second quarter.'
Westpac is predicting first-quarter growth of just 0.1 per cent after joining ASB by taking a 60 basis-point axe to its original 0.7 per cent forecast.
Bank and non-bank economists appear united in the view that Reserve Bank governor Adrian Orr will take note of the coronavirus outbreak when it makes its next monetary policy statement on Wednesday, but that it won't respond by cutting the official cash rate (OCR).
The bank wrong-footed most pundits when it left the OCR unchanged in November, and before that when it slashed the rate by 50 basis points in August.
But it should be 'third time for lucky' for analysts and economists who believe the Reserve Bank will leave the OCR unchanged at 1 per cent.
One question facing the Reserve Bank may be whether an interest rate cut would do much to cushion the sectors most-directly exposed to the economic fall-out of the coronavirus, which for the time being are tourism, agricultural exports and the international education industry.
A further interest cut wouldn't do anything much to enable or persuade more visitors to travel to New Zealand, or to encourage Chinese consumers to start eating out again on Kiwi seafood in Beijing or Shanghai.
Instead, the main coping mechanism to counter a drop-off in tourism and food exports should be the exchange rate, which ASB noted had duly declined following the coronavirus outbreak, independent of any hope for an OCR cut – and retail interest rates as banks draw their own conclusions.
The New Zealand dollar was fetching more than US67 cents at the start of the year, and that had slipped back to only just over US64c on Monday.
While the Reserve Bank won't want to appear aloof from any crisis, the risk is that a further untargeted monetary stimulus now would only serve to fuel a fresh bout of house price rises and other asset inflation, while not bringing relief to those who might need it.
The longer term impacts of the coronavirus outbreak are even harder to pick.
Evidence from the Sars outbreak suggests tourism can 'bounce back' solidly the year after a disease-related downturn, though economist Infometrics has voiced doubts that history will necessarily repeat.
The Chinese government has announced a temporary ban on its wild animal trade and any case of a virus jumping species could be expected to result in tighter food safety norms and regulations.
That should play to one of the strengths of the New Zealand economy, down the track.