Coronavirus and drought deliver 'perfect storm' - NZIER

New Zealand will likely see no GDP growth this quarter as coronavirus and drought deliver a short, sharp shock to the economy, according to new forecasts by the NZ Institute of Economic Research.

"Covid-19 and the drought have created a perfect storm for the New Zealand economy," said NZIER principal economist Christina Leung.

The NZIER is now expecting average annual GDP growth of just 1.9 per for 2020. That compares with 2.6 per cent growth it had pencilled in for the year to March 2020 in its last quarterly prediction.

"Exporters are expected to bear the brunt of the effects, and we expect activity will be flat in the March quarter," Leung said.

"Normally supply concerns about the effects of the drought on milk production would push up global dairy prices, buffering farmgate returns. However, this time around any upward pressure on prices is offset by reduced demand as a result of the coronavirus outbreak."

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Although there would be a pickup in GDP growth through the rest of the year the effects would linger, even if the disruption was largely contained in the first half of the year.

"In the short term, the uncertainty revolves around the ability of exporters to redirect their exports to other markets," Leung said. "Over the longer term, the uncertainty is whether the coronavirus has any persistent negative effects on global growth."

The NZIER assumed trade disruptions occur mainly over the first half of 2020, while the travel ban on Chinese tourists and international students remains in place over February and March, with visitors gradually coming back on board over the remainder of the year.

Any developments which suggested a more severe and prolonged outbreak would mean a larger impact on export demand and further weaken the GDP outlook.

Despite the subdued growth outlook the NZIER is tipping the Reserve Bank will keep rates on hold through 2020.

While the coronavirus effect added uncertainty there was scope for the Government to provide support and stimulus.

"Cutting interest rates ... would have a much more muted impact beyond depreciating the NZ dollar and providing some buffer for exporter returns, but at the cost of placing further risks on financial stability," Leung said.

"We expect the Reserve Bank will keep the OCR on hold until late 2021 before embarking on a gradual tightening cycle."

Running counter to drought and coronavirus risk was the current strength of the domestic economy, Leung said.

Prior to the coronavirus outbreak, households had been feeling more optimistic as the housing market picked up and business confidence was recovering on positivity about the Government's plans, with the announcement of $12 billion in future infrastructure spending.