NZIER expects coronavirus and drought to put a brief handbrake on the economy - Quarterly Predictions, March 2020

26 February 2020

Embargoed until 1am, Wednesday 26 February 2020
NZIER Quarterly Predictions, March 2020

The combination of the COVID-19 coronavirus outbreak and drought is expected to deliver a short sharp shock to the New Zealand economy, as detailed in the latest NZIER Quarterly Predictions. “Exporters are expected to bear the brunt of the effects, and we expect activity will be flat in the March quarter. Although we expect the effects to linger over the remainder of 2020, as they lessen over time growth should pick up from the March low”, said Principal Economist Christina Leung.

Effects expected to be temporary

It is early days and there is a large degree of uncertainty over the magnitude and duration of the effects from the coronavirus outbreak. In the short-term, the uncertainty revolves around the ability of exporters to redirect their exports to other markets. Over the longer-term, the uncertainty is whether the coronavirus has any persistent negative effects on global growth.

We have assumed trade disruptions occur mainly over the first half of 2020, while the travel ban on Chinese tourists and international students are in place over February and March with visitors gradually coming back on board over the remainder of the year. We have also assumed the coronavirus outbreak has no lasting damage to global growth, and in turn demand for New Zealand exports. Developments which suggest these assumptions do not hold would likely mean a larger impact on export demand, and in turn weaker GDP growth in the New Zealand economy.

There is underlying momentum in the economy

The fundamentals for the New Zealand economy are still strong. Prior to the COVID-19 outbreak, households had been feeling more optimistic in light of the pick-up in housing market activity. Business confidence was recovering as businesses felt more positive about the Government’s plans, with the announcement of $12 billion in future infrastructure spending.

This edition of Quarterly Predictions includes a special feature looking at the composition of infrastructure spending over recent history.

RBNZ does not expect to have to ease further

The Reserve Bank highlighted the recent improvement in economic activity and emerging upside risks to inflation from any further pick-up in wage growth. Underlying the Reserve Bank’s forecast is the assumption that the effects of the coronavirus will largely be felt in the first half of 2020. Given the underlying momentum in the New Zealand economy the central bank does not expect to have to cut the OCR again. We concur and expect the Reserve Bank will keep the OCR on hold until late 2021 before embarking on a gradual tightening cycle.

Quarterly Predictions is an independent review of New Zealand’s economic outlook and includes comprehensive forecasts of the economy. The full publication is available exclusively to NZIER’s members.

For further information, please contact:
Christina Leung, Principal Economist & Head of Membership Services
christina.leung@nzier.org.nz, 021 992 985

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