Logs stacked up in Gisborne waiting to go to China. The port can take no more and is closed to new logs.

The enormity of the coronavirus crisis is beginning to sink in with forecasts now that it could lead to a recession later in the year in New Zealand.

Finance Minister Grant Robertson is expected to speak today on the economic implications of the virus.

But already there are fears among the Government parties in Parliament that if the economy does suffer a setback that could play into the hands of National who have consistently outpolled Labour for their economic management abilities.

A measure of the international slowdown has come with plummeting oil prices.

The International Energy Association said yesterday that its oil demand forecast is at its lowest in a decade, and it could fall further. “We certainly see the lowest oil demand growth in the last ten years, and we may need to revise it downwards,” IEA executive director Fatih Birol said.

The biggest immediate impacts in New Zealand are in tourism, forestry and education.

ACT Leader, David Seymour argued yesterday that the situation was so serious that the Prime Minister should cut short her current trip to Fiji and Australia and return home.

“Make no mistake, a crisis is emerging,” he said.

“The situation has materially worsened since the Prime Minister left for Fiji.

“The number of countries affected has grown to 37, the position taken by foreign governments has hardened, and the financial markets are starting to reflect a slowdown in the real economy.

“These are just the developments of the past 48 hours.”

Infometrics economist Brad Olsen has analysed the immediate potential impact on the New Zealand economy.

He concluded that:

  • Tourism activity is expected to further lose momentum. Internal Chinese travel restrictions and New Zealand’s interim ban on Chinese arrivals could lop off 25,000 arrivals in February 2020 alone, representing around 6% of all monthly arrivals.
  • Retail activityhas already seen a noticeable effect, with lower foot traffic, lower orders, and reduced hours at some shops as spending activity softens. As the outbreak persists, increasing numbers of retailers are likely to feel operating pressures build.
  • International education is already counting the cost, with 6,500 students who were scheduled to attend New Zealand universities remaining in China. The effects could be even greater when the rest of New Zealand’s international education sector is considered, alongside the flow-on effects from not having these students spending in the local economies.
  • Seafood exports have borne the most immediate effect of the outbreak; China takes around 38% of New Zealand’s total seafood exports.
  • Forestry is being severely hit, with China taking more than 50% of New Zealand forestry exports. A lack of Chinese wharf and economic activity has curtailed log demand. Wood prices were recovering after a sharp dip in 2019, but the outbreak now looks set to force prices even lower.
  • Meat exports have struggled to make it through Chinese wharves as workers remain at home, resulting in New Zealand meat processors running out of chiller space. China took 38% of all meat exports in 2019, up from less than 2% a decade earlier.
  • Dairy prices fell 4.7% in the latest GlobalDairyTrade auction, but that result was still stronger than some indicators were suggesting.

Olsen concludes that economic activity both in New Zealand and globally will take a sharp hit from the outbreak in the first half of 2020, although activity could rebound strongly after the outbreak is contained.

“An immediate and significant reduction in economic activity means that a quarterly drop in GDP is a distinct possibility,” he said.

“If the outbreak continues, the slump in local economic activity could trigger New Zealand’s first recession in a decade.

He said lower Chinese growth would also hit New Zealand’s other trading partners, such as Australia, which will exacerbate weaker demand for exports.

“The wider fear and lower export activity will undermine business and consumer confidence, with the likelihood of slower growth in consumption and investment spending,” he said.

“Possible policy responses to combat a slowdown include a lower official cash rate, tax adjustments from the government, or other plans for more direct and fast-acting fiscal stimulus to increase output.”

Olsen said the virus threw into sharp relief New Zealand’s increasing reliance on China as an export market since the signing of a free trade agreement (FTA) in 2008.

In 2007, prior to the FTA, China comprised just over 8% of New Zealand global two-way trade.

By 2019, China represented 20% of New Zealand’s two-way trade. In the past 12 years, two-way trade with China has quadrupled to $32.7 billion.

But there are other implications particularly diplomatic.

Whether New Zealand will continue to have what President Xi Jinping last year called one of the closest relations of any western country with China is now open to question.

The travel ban on the students has particularly irked the Chinese; the Ambassador held an unprecedented press conference to denounce it and repeated her complaint at a Beehive function attended by the Prime Minister last week.

It is possible the ban might be relaxed in tandem with Australia at the weekend. But it is far from certain.

But speaking yesterday Australia’s Chief Medical officer, Brendan Murphy said the medical advice to the Government was to be fairly cautious.

Finance Minister Grant Robertson is expected to address some of these issues in a speech today.

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