STATE OF THE NATION – FEBRUARY 2020
Economic Update from Sharon Zollner – ANZ Chief Economist
Over year-end increasing evidence emerged that the slowdown in the economy was finding a floor, with a consistent turn upward across indicators such as the ANZ Business Outlook Survey and the Truckometer. Our leading indicators suite showed signs of bottoming out, and the housing market is responding enthusiastically to the marked fall in mortgage rates, with sales and prices both sharply higher. That’s a mixed blessing, certainly, but it will support spending and therefore GDP growth. Our commodity prices had their ups and downs, but on the whole we're looking remarkably resilient to slowing global growth, reflecting constrained global supply of meat and dairy, particularly. The medium-term picture got a boost from the Government’s $12bn boost to infrastructure spending, and we see upside risks to fiscal spending in the meantime, given it is an election year.
Unfortunately, a very large spanner has now been thrown in the works.
The devastating COVID-19 outbreak is wreaking havoc and suffering across China, and now spreading to more countries. It is also wreaking havoc on global imports and exports. And New Zealand is a trade-dependent economy.
On the export side, seafood, logs, meat and dairy products have been affected to a greater or lesser extent, struggling to get their deliveries unloaded at congested Chinese ports. On the import side, many of China’s factories remain closed – New Zealand has stocks of goods to last a while, but if disruptions persist for a long time, it could impact industries such as construction, manufacturing and farming, with China an important source of everything from plastics to machine parts to building materials.
Exports of services – tourism and foreign education – have also been impacted, and at the time of writing, it is unclear how long the travel ban will need to be in place.
Our base assumption is that the disruption will be short term, and that activity will rebound aggressively once things return to normal. That is the historical experience for this kind of event. But for now, there is little evidence that things will be back to BAU any time soon, and rising cases in other countries such as Japan and South Korea raise the chances that economic disruption could spread, rather than shrink, for a while yet.
For now, we’ve taken a decent chunk out of GDP growth in the first half of the year, but assume we’ll get most of it back in the second half. That’s the sort of shock that the Reserve Bank can ‘look through’ – it fixes itself, essentially. But the risks are skewed to the downside of that scenario, particularly with drought conditions across much of the North Island upping the ante on getting cull stock off the land at a time when processors are unable to take many animals because of the congestion further down the delivery pipeline. There are also question marks around what state the Chinese consumer will be left in once the initial disruption phase has run its course. The labour market may take a pretty significant hit, and many of New Zealand’s food exports to China fall firmly into the ‘nice to have’ category, rather than staples.
We’ll be watching the data closely: tourist arrivals from countries other than China, departures of New Zealanders offshore (a potential offset), import and export volumes and prices, and of course the statistics about the virus itself, and whether vigorous containment efforts are working. We’re not epidemiologists and so have no particular confidence that the assumptions we are making are more accurate than anyone else’s, but assumptions must be made to produce forecasts, and we’ll keep updating as more information comes to hand.
Meanwhile, the housing market continues to support spending here at home. The Reserve Bank can’t let it rip away on financial stability grounds, but it has its macro-prudential limits on high-LVR lending as a tool it can roll out to contain the market if things start getting out of hand. Household debt is high, at 164% of household disposable income, but consumer sentiment is solid, with the housing market lifting and the unemployment rate is still historically low at just over 4%, despite a slowdown in employment growth last year.
The Reserve Bank is optimistic that the job is done and that they will not need to cut the OCR again or resort to unconventional monetary policy levers. However, being aware that no one ever sees New Zealand recessions coming (in that they have historically tended to be sparked by unforecastable commodity price crashes and droughts) it is prudently preparing its strategies just in case. In our view, 0.25% would be a sensible low for the OCR, and buying government bonds would be the most logical first step if the Bank feels it needs to get creative.
With the housing market responding enthusiastically to low-interest rates, while we are sceptical that business investment will do the same (particularly now that global growth has question marks over it) the baseline for future growth is decent. So if our assumption is right that this is a bump in the road, growth should be back on track by the end of the year, with inflation heading back to target and no lasting damage to the labour market. But our fate hangs in the balance.
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