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17 Feb 2020

The Economic Reality of the Coronavirus

The economic consequences of the coronavirus (COVID-19) could end up being almost as damaging as the infection itself. While Chinese factories are back at work, and financial markets seem mostly undeterred, entire Chinese cities remain in lock down and trade has been severely disrupted across the country. Quarantines aimed at containing the disease have severely handicapped the Chinese economy, with knock-on effects already being felt throughout the world.

The coronavirus is having a significant influence on commodity and foreign exchange markets, and adversely affecting China's trading partners including Australia and New Zealand. Based on the value of export markets to China relative to GDP, Taiwan is likely to be the hardest hit by the virus, followed by Vietnam, Malaysia, and South Korea. Even places like Australia and New Zealand are feeling the impacts, with the coronavirus putting additional pressure on both commodity exports and the tourism sector.

The Chinese economy is expected to grow just 4.5% in the first quarter of 2020. This is much lower than the 6% growth recorded in the final three months of 2019. While the Chinese Government is using targeted fiscal measures to soak up coronavirus losses, this will only work for so long. While travel bans are in place, regional employers across Asia will suffer from a reduction in the number of Chinese workers. The outbreak will also disrupt the export of Chinese products, which will cause supply shortages and dampen economic growth among all of China’s trade partners.

The coronavirus has already had an impact on currency markets, with both the Kiwi and Aussie dollars likely to be sitting higher right now if it wasn't for the outbreak. The Reserve Bank of New Zealand’s (RBNZ) latest monetary policy statement was a considerable shift from its negative outlook back in August. While the announcement of no rate cuts for the remainder of 2020 did cause an initial surge in the New Zealand dollar, uncertainty surrounding the coronavirus was partly responsible for the Kiwi's inability to rise further.

The impacts of the virus are likely to stretch beyond the currency markets according to Finance Minister Grant Robertson, who recently forecast a hit of more than $250 million to the New Zealand economy: "The short story, though, is clearly it will have an impact on this quarter's GDP because we are seeing the immediate impacts... Economists from banks, and also the international community are predicting that the [Coronavirus] could shave around 0.3 per cent off Chinese GDP. If that flows into New Zealand, you can make a calculation of around about 0.1 per cent – but that is just at the very, very early stages."

Despite the doom and gloom, New Zealand is well-positioned to handle the challenges of the coronavirus according to Treasury Secretary Caralee McLiesh. "The Treasury has also established an economic advisory group, bringing together the relevant agencies to make sure the Government can co-ordinate advice to Ministers." she said, adding "At this point, we think the impacts will be measurable, but still somewhat limited. As a small open economy, we can never afford to be complacent. But New Zealand's economy, finances and institutions are very well placed to manage risks."