Analysis by Shamubeel Eaqub, RNZ

Covid-19 will affect the health of New Zealanders and the economy. It presents the government with some unpleasant trade-offs.

The more the government does to protect Kiwis' health, the larger the cost to the economy.

Measures to deter its spread will dent the economy, with outsized impacts for some industries and regions. The most immediate impacts will be a cash-crunch for some businesses and a loss of confidence.

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Sweeping statements about the coronavirus and its consequences are pointless. We simply do not know how the pandemic will unfold. But we can assume that 2020 is off to a very bad start and rather than a quick rebound, weakness extends towards a winter of discontent.

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The economic impacts of Covid-19 will be different to those from other external shocks to the economy. The export impacts have been well highlighted, but importers will suffer too. And there's potential for the impacts to spread to the non-tradable sector too, especially if more New Zealand cases start to present themselves and people movements are restricted.

Orthodox policy responses may not be sufficient in such a crisis. Still, the Reserve Bank (RBNZ) should cut interest rates to boost confidence and lower the NZD.

Banks should be gently prodded to extend lines of credit to businesses, and big businesses should be flexible with payment terms to help SMEs.

Most importantly, the government needs to provide relief with surgical precision - to the most affected businesses and communities through targeted assistance - because averting job losses and business failures will ultimately cost a lot less. A cross party approach would be more effective than the usual political point-scoring and undermining typical of an election year.

New Zealand is fortunate that it enters this risky period in solid economic shape and has more flexibility and options than other economies.

Financial markets are spooked

The most immediate impact has been on financial markets. Share markets have fallen and safe-haven assets like gold, the Swiss Franc and bonds have risen (meaning interest rates have fallen).

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Markets are hoping that central banks will work their magic: cut interest rates and flood the world with even more easy money. But at record low interest rates and after sustained periods of quantitative easing, we don't know if these tools can still help revive financial markets and the real economy.

We don't know which way markets will gyrate, but for older folk, it is a good catalyst to reassess their investment portfolios with an independent expert. They need to make sure their income needs for the next 5-10 years are secure. For younger folk it is more important to keep saving and contributing to their KiwiSaver accounts, rather than trying to time the market.

The RBNZ should be prepared to provide funding facilities for banks. During the global financial crisis (GFC), banks found it difficult to roll over global debt funding (around $30 billion of global debt funding will need to be refinanced over the next month). It was in the end easily facilitated by the RBNZ and can be done again.

Economy is exposed

The economy is exposed to the disruption caused by the disease. Attempts to quantify the impact are fraught, as we don't know how far it will spread and how long it will last. Instead, we need to respond to what we know will happen - a cash crunch for businesses who trade heavily with China and a general loss of confidence.

Demand for many of our exports have fallen, because people are not eating out and work is disrupted in China. This is spreading to other countries.

Flights from China have stopped, meaning no visitors or trade in the belly of planes. Many Chinese factories are shut, affecting our imports from China and other countries, because China is an integral part of global supply chains.

So, the shock for our economy will be both a demand shock (affecting tourism, education and goods exports) and a supply shock (affecting our imports and perhaps disrupting the labour market if people can't get to work). This is different to a normal demand shock only scenario, such as the GFC or even previous disease outbreaks.

This is SARS times six

The obvious case study is SARS in 2002-03. But only if you magnify it and understand the differences. To date, the most affected economy is China. Our economic relationship with China through tourism and trade is roughly 6x larger than when SARS hit. As the disease spreads to other countries, so too will the economic effects.

This throws up the obvious and lazy idea that we are too reliant on China. This is wrong-headed.

We are more exposed to China than when SARS hit in 2002-03. Image / Supplied
We are more exposed to China than when SARS hit in 2002-03. Image / Supplied

Our economic success - and current strong economic position - has been driven by Chinese growth in recent decades. China pulled us through the GFC, for example. Our overall export growth - and the subsequent flow on impacts on jobs and incomes - would not have been so strong without China's willingness to buy vast amounts of what we specialise in producing. But it is a truism that our reliance on China comes with downside risks as well as opportunity.

Demand shock

The shock to New Zealand businesses will be big. While it is tempting to look at the impact on the economy as a whole, the disruption will - at least initially - be localised to specific industries and regions, and immediate solutions should be focussed on them.

The first disruption will be from China, which last year accounted for 16 percent of tourism income and 28 percent of goods exports. I estimate some 15,000 tourism jobs and another 15,000 export sector jobs are most exposed to the current China shock. Japan, Korea and other countries may be next in line as the virus, and efforts to contain it, spread.

Tourism will be hardest hit in places like Lake Tekapo, Queenstown, Westland and Kaikōura. In each, Chinese visitor spending alone makes up 4 percent or more of their local economy.

Exports of forestry, meat and dairy will be hardest hit. But so will be many specialised exports, like infant formula and rock lobster.

Export education is worth nearly $5b to the economy and contributes over $1b a year in fees to education providers. Last year 33 percent of student visas were to Chinese. These institutions will need help, either by allowing students to come (with appropriate safeguards in place) or through financial support.

China is a key destination for our exports. Photo: Sense Partners calculations from Statistics NZ data. Source / Statistics NZ data
China is a key destination for our exports. Photo: Sense Partners calculations from Statistics NZ data. Source / Statistics NZ data

For exporters, interest rate cuts by the RBNZ would signal commitment to support exporters and the economy, and may also bring the NZD down a little. I reckon the RBNZ should cut the OCR by 0.5 percentage point to 0.5 percent.

Supply shock

In a world of global value chains, China plays a massive role in providing intermediate and capital goods that support other countries' production and exports. New Zealand is highly exposed to Chinese economic disruption in this respect: 20 percent of our imports are from China. If New Zealand firms don't have easy access to these imports, output and exports will slow.

For most, there is no easy way to shift to another supplier. Firms all over the world - most with deeper pockets than Kiwi firms - will also be seeking out alternative suppliers of the things China normally sells. Given Chinese dominance in the production of many products, alternative suppliers may be hard to find.

Many of our industries are heavily exposed to China. Sources / Sense Partners calculations from UN ComTrade and Statistics NZ data
Many of our industries are heavily exposed to China. Sources / Sense Partners calculations from UN ComTrade and Statistics NZ data

Some 45,000 jobs are exposed directly to a decline in these imports across a broad range of sectors, but highest in primary (agriculture, forestry, aquaculture) and manufacturing (most types of manufacturing rely on imports).

We are highly reliant on imports from China. Source / Sense Partners calculations from Statistics NZ data
We are highly reliant on imports from China. Source / Sense Partners calculations from Statistics NZ data

This has knock-on effects for logistics and retail sectors too - meaning the shock could transmute to a larger shock for the domestic economy, compounded by the feedback loops of potential job losses.

Political response

Management of a disaster is inevitably political, especially in an election year. But we should be treating Covid-19 in the same way as the GFC, Canterbury earthquakes and the terrorist attacks in Christchurch - an event that transcends the usual petty politics. We need a cross-party effort and united message to restore confidence and agree on a set of good policy responses. Partisan political point scoring would only undermine the effort to protect our jobs and economy.

Economic policy response

The scale of the shock is large. It is concurrently a demand shock and a supply shock. It is unprecedented in recent history, and warrants a rapid and multi-pronged policy response. It is very unlikely that the economy will rapidly rebound, we should instead prepare for a long and lingering impact. We have fiscal headroom to move quickly and strongly - if there was ever a time to stop myopically fretting over government debt targets, Covid-19 is it.

The focus should be on:

Initially: Protect jobs and businesses

• The RBNZ should lower interest rates (say by an initial 0.5 percentage point to an OCR of 0.5 percent) to try and stimulate the economy.

• The RBNZ should open up funding facilities for banks in case international debt funding markets seize up like they did during the GFC.

• Support businesses reliant on China by reducing their cash flow crunch. Banks (who may require prodding by RBNZ and government) should extend lines of credit to firms.

• Government agencies should be directed to speed up payments to firms and be flexible with their supplier. Large firms should also do this voluntarily.

• Government support, perhaps via unemployment benefits with no stand down period for their staff for a fixed period (say one month), will buy time while businesses assess the fallout from the virus.

• Continued deployment of our offshore network to generate real-time market intelligence that can be quickly relayed to New Zealand firms. If firms are more informed about early warning signs as the virus spreads in other key markets, they will be better placed to put in place mitigation strategies.

• Provide support to districts of known economic reliance on China (such as McKenzie, Queenstown-Lakes, Westland, Kaikōura, Nelson-Tasman and Gisborne) supported by local intelligence of economic development agencies, chambers of commerce, and Ministry of Social Development (who will see increases in job losses and hardship).

• Schools, polytechs and universities should be able to borrow from government at no interest for a year to make up any lost fee income (some weak institutions may simply need grants), unless students are allowed to return with appropriate safeguards.

Long term: Invest in the recovery

• Government fiscal programme probably needs to be increased, perhaps through tax cuts at low thresholds and perhaps introducing a new high income tax threshold to reduce the fiscal impact. Maybe adopt the type of progressive tax rate structure employed in Australia (we pay more taxes on income up to $60k than Australia).

• Invest (in money and economic diplomacy through Tourism NZ, NZTE, MFAT and others) to restore air connectivity, tourism flows and trade as quickly as possible. Post SARS we lost tourism market share from China and Asia, which we didn't really recover from until recently. Our important economic partners need to know that we are open for business and pleasure, and that they are very welcome.

Shamubeel Eaqub is an economist at Sense Partners.
- RNZ