26 Feb 2020

Economic impact of coronavirus outbreak: Govt preparing for the worst

10:27 am on 26 February 2020

The government is planning for a serious hit to the New Zealand economy following the Covid-19 coronavirus outbreak.

Finance Minister Grant Robertson.

Finance Minister Grant Robertson has three scenarios the government is preparing for. Photo: RNZ / Dom Thomas

World stockmarkets have fallen further amid investor concerns over the spreading virus.

Wall Street's three major stock indexes fell more than 2 percent after officials said the coronavirus was "a rapidly escalating epidemic".

Our own top 50 index fell 1.5 percent on open. It fell 3 percent yesterday, but came back up to just over 1 percent down by the end of the day.

Finance Minister Grant Robertson told Morning Report the economy is strong but could really feel the impact of the virus in the first half of the financial year.

He said the government's looking at various possible scenarios and their effects on New Zealand, with the worst of them being a global recession.

"It certainly emphasises the seriousness of the situation and the market reaction in these kinds of circumstances is something I think we we're all expecting. Clearly, there was a bit of bouncing around in the New Zealand market yesterday and I expect you will see there will be a bit of that over the next few days.

"It is indeed a reaction in many ways to the somewhat inevitable spread to other countries and I think people are now really thinking about what might happen in terms of markets. But yes, it's one example of why we have to take this very seriously."

NZIER, the economy think-tank, is forecasting no growth for at least one quarter.

"We're right at the point now where we're making decisions about the budget and, as you know, the budget is based on forecasts of how the economy will be over the next year and we're in a very uncertain period on that. But, as I've been saying for a couple of weeks now, the first quarter and indeed the first two quarters of 2020 will be ones where growth will be hard to come by in the economy.

"You don't have a situation where a large sector like tourism has such a big hit, international education, some parts of the primary industries, the forestry sector. If all of those sectors are being hit the way that we're seeing, that automatically has an impact on where we're at.

"We hope that we will be able to see growth in the second half of 2020 but, clearly the further the virus spreads, the longer lasting the impacts are likely to be. We are currently planning for the first half of 2020 to be slow in terms of growth but the underlying fundamentals of the New Zealand economy are good. That NZIER report makes that point.

"We're in a good position to recover, but there will be a serious impact in the first half of the year."

ANZ chief economist Sharon Zollner said the bank is "pretty worried" about the economic impacts of the virus.

"Obviously there's been some pretty devastating impact on businesses globally, but we're starting to see those effects, economically, come to our shores.

"We know that businesses are being affected, it's very difficult to get product into China and, as a consequence of that, we basically see a very sharp dent to growth in the first quarter of this year with the possibility that GDP simply stalls over the first half of this year."

However, Zollner said they expect a bounce back in the second half of the year.

"We do think it's going to take some time for that to occur because supply chains are very long and it could be quite difficult to get activity up to speed again.

"Because this is a very fast moving situation, those forecasts are constantly under review. The more we hear about spread to other countries, the more we hear about global economy impacts, the more worried we become."

She said that while people tend to think about New Zealand as an exporter, we are very much reliant on imported goods.

"Should our supply chains be affected, then that could have a much more widespread impact."

Zollner said, at this stage, ANZ doesn't see a recession on the horizon, but it won't rule it out either.

"As a nation, we need to potentially be prepared for it."

Robertson said the government is looking at three scenarios.

"One is that there's a level containment, which means we get back to normal within the next two or three months. The second is that the outbreak spreads further, is longer lasting and has an impact through 2020 and, obviously, that scenario is becoming more likely. The third scenario is one where we move toward a global recession. That would obviously have significant impacts on New Zealand," Robertson said.

"We're doing preparation for all of those scenarios at the moment. For instance, what are the correct policy interventions we would make. Obviously, if you get to the third scenario, and I'm not saying we're predicting that - we're simply preparing for it, if we did get to that it would require a high level of intervention from the government in order to support people through it."

Robertson said the government would consider tax cuts or cash payments in order to stimulate the economy in the case of global recession.

"In that third scenario, you would be looking at things that provided fairly immediate stimulus to the economy and the support that people would need to get through a global recession. Those are very serious situations and one in which you'd be looking at all options.

"The government's job remains to protect the public's health and wellbeing of New Zealanders and we've always got to focus on the most vulnerable in our community to ensure that they get the support they need," he said.

"There will come a point where this will finish, this virus outbreak will be contained, vaccines will be there, and the New Zealand economy needs to be able to kick on from there. All of these measures we're talking about is how we will get through this period. We've got a good base to move from, we're doing the planning now to make sure we're ready for whatever happens."

National Party leader Simon Bridges said the government is lacking a comprehensive plan to deal with the economic fall out from the virus.

He told Morning Report the economy should have been in a stronger position to begin with.

"Grant Robertson says the fundamentals are good, yes they're okay, they could have been better if it wasn't for the tax, the cost, the red tape and the uncertainty that this government has piled on.

"We're now faced with ... a very uncertain set of events, primarily around coronavirus but actually the droughts in New Zealand are a very significant issue as well and what I'm suggesting is what New Zealand needs is not just sector by sector relief, but that comprehensive plan that National has for New Zealand."

Virus could impact most of the world

A vaccinologist said it's looking unlikely the coronavirus will be contained, meaning huge numbers could contract the virus in the 12-18 months it will take before a vaccine is available.

In an interview with US magazine The Atlantic Harvard epidemiology professor Marc Lipsitch said he believes as many as 40 to 70 percent of the world could be infected by the virus in the coming year.

Auckland University vaccinologist Helen Petousis-Harris agreed that it's looking more and more unlikely that the virus will be contained.

"There is certainly the chance that a lot of the world's population will be, ultimately, infected with it.

"You have to be concerned because it's clearly a disease that can be quite serious and has resulted in a lot of deaths. At the moment, we still don't know how many people are infected or what the mortality rate is - that's still information that we don't know."

Petousis-Harris said a lot of people get a very mild reaction while some have no symptoms at all.

"If you look at China and you look at the numbers of deaths they've had from covid-19, they see about 90,000 deaths a year from influenza."

She said the number of cases being reported in China has slowed down and the country has demonstrated that the spread can be curbed.

"You want to slow it as much as possible because you don't want everybody requiring hospitalisation - because that overwhelms the health systems."

Petousis-Harris said the target for getting a vaccine to trial is around 16 weeks and that looked to be on track. From there, the World Health Organisation is suggesting 12-18 months for something widely available to the public.

"The first targets will be those most at risk, the frontline health workers - and I presume it will progress from there."

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