Coronavirus versus SARS: Assessing the economic risks for New Zealand

In 2003, NZ's goods exports to China constituted about 5 per cent of the total; today, that total is about 26 per cent. Photo / File

COMMENT:

While scientists and health experts scramble to find a vaccine and cure for the coronavirus, the economic repercussions of the outbreak–in New Zealand and around the world– are only beginning to emerge.

While it is difficult to exactly quantify the magnitude of downside economic risks such an event brings to New Zealand in the shorter to medium term, there is a unanimous consensus that, economically, the coronavirus will have a stronger adverse impact than the severe acute respiratory syndrome (SARS) outbreak in 2003.

At that time, the global health event reduced China's quarterly economic growth by 2 per cent; the estimated costs to the global economy was about US$30 billion ($46.2b). Notably, China's share in world GDP at that time was 4 per cent, significantly lower than the current estimate of 17 per cent.

This four-fold increase in economic dependency on China worldwide, primarily due to its status as a global manufacturing hub over the last decade and emergence as a key nodal point for production networks in Asia and globally, is likely to more severely impact trade, globally and for New Zealand, at least in the current quarter.

The following points illustrate how the outbreak will directly and indirectly impede the New Zealand economy. In 2003, NZ's goods exports to China constituted about 5 per cent of the total; today, that total is about 26 per cent.

Hence, any slump in export demand from China in the current quarter has a much stronger direct impact on goods earnings for our exporters compared to 2003. This is already evident in our food exporters beginning to face a declining demand for meat products, forestry, flower and seafood products from consumers in China.

As imported intermediate inputs from China and rest of Asia are also used in production of New Zealand agriculture and food exports, potential disruptions in their supply chains due to this event can add on a further indirect impact adversely on our goods exporters.

As of year-end June 2019, China was the fourth largest service-export destination, constituting 13 per cent of New Zealand's total exports of commercial services. In 2003, this figure was less than 2 per cent. Further, 87 per cent of New Zealand's service exports earnings from China as of 2019 came from education related travel, and personal travel including tourism.

These service exports are expected to decline sharply with the upcoming ban on foreign travellers who leave or transit through mainland China entering New Zealand, directly impacting on our service exporters' earnings.

As both these service exports involve consumption abroad as a mode of provision, there will be an indirect negative spillover in terms of reduced consumption demand that would otherwise have been generated at this time of year.

Traditionally, New Zealand's summer season is a busy time for Chinese visitors and international students studying at New Zealand schools and universities. This has already cost the local economy of Auckland, with number of tourism events, including its much anticipated and well-attended annual Lantern Festival now cancelled due to the health outbreak.

A "worst case" scenario would look like this: zero visitor arrivals from China until March 2020, followed by a pick-up by at least 50 per cent the following month, accompanied by a 20 per cent decline in overall arrivals from Asia (whether for tourism or education). It's estimated that such a situation would result in at least a 0.4 per cent decline in our GDP in the first quarter of 2020.

This is of course, a conservative estimate, as it assumes that the coronavirus outbreak would be contained by then, and that there would be some semblance of return to "business as usual".

Screening stations have been set up at Auckland Airport to combat fears surrounding the coronavirus. Photo / Mediaworks / Dan Jones

Given that the SARS outbreak took about eight months to contain, it is not unreasonable to assume that travel and education services exports from New Zealand may veer off their normal trajectory at least until mid-2020.

While the indirect impact of the coronavirus on New Zealand consumers and consumption spending remains unclear, he direction is likely to be negative.

One obvious channel is the disruptions caused to the supply chains of major consumer goods globally due to China's role as a manufacturing hub.

There are already reports of factories there being closed or facing temporary shutdowns in hi-tech manufacturing including automobiles and telecommunications.

These measures will contribute to increasing production costs in China, and therefore prices for the global consumer, as well as here in New Zealand.

The second and more difficult channel to quantify is the indirect effect on New Zealand's trade with other trading partners where there are confirmed cases of this outbreak, and among those who also share a close economic relationship with both New Zealand and China. Australia, US and Japan all fit into this category.

In the short term, it would not come as a surprise if New Zealand had fewer tourist arrivals and more travel postponements from these countries. Business-related travel disruptions are also likely to have an indirect adverse impact on investment decisions.

The longer the uncertainty around the outbreak remains, the greater will be the downward spiral of investor confidence.

Finally, we must also face the likelihood of having a confirmed case of the coronavirus outbreak in New Zealand. Clearly, if that were to happen, there will be additional costs associated with managing the uncertainties for domestic businesses apart from exporters, and this could potentially cause a further drag on economic growth.

As a small open economy, we have enjoyed the fruits of globalisation for over two decades. Now, unfortunately, we must face the negative externalities globalisation can also bring. The coronavirus is a global problem and it will require global solutions.

At the moment, it appears that we are well-equipped to face it, but for how long? This is the critical question that no one yet can answer.

- Dr Rahul Sen is an economics expert at AUT.