Recession, share market slump, interest rate cuts: How coronavirus might affect your money

Wednesday, 26 February 2020

Another day, another headline about coronavirus, otherwise known as Covid-19.

While some predict a pandemic that will push the global economy into recession, others say that fear is overblown and the coronavirus will be a distant memory in a few months' time.

But if you've checked your KiwiSaver balance lately, you may already be starting to feel the impact of the virus a little closer to home.

So how big a deal is it, and how hard is it likely to hit you?

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On Wednesday, several European countries reported their first cases of the virus – including Austria, Croatia and Switzerland. Italy has had more than 300 cases and 11 deaths.

So far, New Zealand has not reported any cases. Assuming we aren't hit with a major outbreak, that means that the most immediate effects felt by Kiwis are likely to be economic.

YOUR JOB

As China has now become a very significant trading partner for New Zealand, many Kiwi jobs are directly or indirectly affected by heavy restrictions on goods and people travelling in and out of China.

But economist Shamubeel Eaqub said people who were only interested in the effect on New Zealand exporters were approaching it from the wrong direction. 'The big disruption is more likely on importers.'

He said this country was very reliant on China for everything from cellphone parts to lounge suites. Almost a third of our plastic packaging is made in China.

There were a number of niche New Zealand manufacturing businesses that were very successful but reliant on Chinese-supplied parts and goods to survive, he said.

'That part is not well understood.'

There could be 15,000 jobs in affected export sectors but 45,000 in importing.

Those jobs would not necessarily be lost, Eaqub said, but the businesses they worked for would be put under pressure.  Provincial economies would be affected by the hit to forestry and to dairy while city centres were more likely to be affected by disruption to importers.  Retailers had moved to 'just in time' inventory management so they did not have a lot of stock on hand. 'We import a hell of a lot of stuff from China that you can't easily get from other places.'

People who worked in tourism would also be affected, he said, because Chinese visitors were an $1.8 billion boost to the economy. In the Mackenzie District, 16 per cent of the local economy was reliant on Chinese tourism.  In Queenstown it was 8 per cent.

While there had been similar outbreaks before, he said New Zealand was now much more reliant on China than it ever had been. It was 28 per cent of exports now compared to 5 per cent when Sars was happening. Chinese tourists are 11 per cent of the market now compared to 4 per cent then.

Paul Barkle, an economist at Infometrics, agreed businesses could see their production 'grind to a halt' if there was enough disruption to the supply chain from China.

 'We're already seeing softer employment outcomes in New Zealand, with conditions in the forestry and tourism sectors looking increasingly vulnerable. In the short term, we expect to see a softer job market in concentrated sectors. However, if the outbreak continues, we could see both business confidence and hiring intentions hit, which could have more widespread long-term consequences for job losses.

'Now's the time for businesses to review their business continuity plans. If Covid-19 was to enter the country it's important that businesses are prepared for how they can continue operating, including plans for remote working and the like.'

YOUR MORTGAGE

No one has a very good track record when it comes to picking the future movements of interest rates.

When the Reserve Bank announced its latest official cash rate decision, it indicated that it had shifted its predictions and was now looking at an eventual increase to the rate, rather than any further cuts.

Barkle said the virus was showing signs of changing that. It's possible that rates could drop a little further, which may reduce retail rates, or keep what you pay on your home loan lower for longer.

'At the latest monetary policy statement, the Reserve Bank of New Zealand held a more optimistic view of the containment of the Covid-19 outbreak, taking a wait and see approach to the impacts on the economy and hoped the virus would have only a short and sharp impact.

'We have already seen indications that perhaps the bank is beginning to change its views, given the governor's speech [on Tuesday]. We believe it is increasingly likely that we will see an insurance cut to the official cash rate in the near term to support economic activity.'

It has been noted that, if there's a Covid-19-related downturn, it's likely that a Government business support package might be more helpful than an interest rate cut.

YOUR KIWISAVER

And yes, you may have noticed your KiwiSaver account take a bit of a dip in the past few days. Share markets around the world have registered concern about the outbreak.  The NZX closed 1.33 per cent down on Wednesday.

'Share markets have taken a hit over the last day as the Covid-19 outbreak grew outside of China, with major drops in both global and domestic markets. Investors are becoming increasingly worried about the risk of a wider outbreak globally, after a spike in cases and deaths in Iran, Italy, and South Korea. There's a growing risk of a global pandemic that has sent investors seeking safer options like gold and bonds,' said Barkle.

'Large companies who rely on Chinese-made inputs are increasingly facing supply-chain difficulties, with the likes of Apple have already cut revenue expectations. Decreasing profit expectations and risk-aversion are following through to lower share prices, and we expect both tourism and aviation stocks to remain soft as the outbreak continues.'

While no one wants to see their investments going backwards, it's worth remembering that this is after a year in which the NZX50 returned 30 per cent, so most investors can handle a bit of a dip without much pain.

As columnist Janine Starks pointed out, there have been scares (and market reactions) like this before, and they have tended to have only a short impact.

The Zika outbreak in 2016 saw the MSCI World index fall 6 per cent over a month but it was back to almost flat after six months.

Unless you're about to retire, the best thing to do is wait out any market bumpiness.

People who would need their money soon should take stock of their retirement plans, Eaqub said, and start to lock in gains by putting it in a safe place.

'If you're less than 55 you don't need to worry about this stuff. In the context of investing it's more important that you invest and save regularly.'

It was too difficult and risky to time the market, he said, because no one would accurately predict when the right time to get back in would be. Seeking cover on the sidelines, you might miss the opportunity to rebound.

RECESSION

Then, the R word. Is New Zealand headed for a recession?

Barkle said it was possible but not probable. 'The first half of 2020 looks set to produce weaker growth, but for a technical recession the economy must have undergone a contraction for two consecutive quarters – that is, the June quarter would have to be worse than the March quarter. Current responses from governments worldwide to limit the spread of Covid-19 have hit tourism activity hard, and there's an increased likelihood of an economic contraction in the March quarter.

'Previously we had been expecting the Covid-19 outbreak to present a short and sharp hit, but as the number of cases outside of China continue to rise, it is looking increasingly likely the outbreak will continue, and with it so will negative economic ramifications.'

NZIER expects flat growth this quarter and then a small increase in the next.

Eaqub said there would be a recession eventually because New Zealand had been through such a long run of growth.

'To me it's not a big deal whether there's a recession or not. It doesn't matter. An economic recession doesn't mean anything to most people. If you're a forestry worker you're in a recession now. Economists talk about things at an aggregate level but no one lives their lives in aggregate. That is why it's important to focus on the specifics of where the impacts are. The linkages are important.'

Nick Tuffley, chief economist of ASB, also talked down the risk of economic meltdown, although he expected global growth to slow further before it improved again.

Locally, he said the disruption from the virus, combined with the drought, was a significant short-term drag that made the economy vulnerable to further shock. But if there was a recession it would be short-lived and shallow.

'We see economic growth grinding to a halt in early 2020 but rebounding over the second half of the year. 

'People need to keep calm and carry on. We tend to be overly cautious around new and ill-understood risks, which is what this virus is.

'The disruption from the virus will eventually settle. That will be an opportune time to review our development contingency planning for a range of business risks, and consider the benefit and costs of diversifying export markets and suppliers,'