Novel coronavirus’s regional economic impact

The economic impacts of the novel coronavirus outbreak are already being felt in our regions.

The brunt of the economic impact is being borne by exports of services (tourism and education), but there are also many goods exports affected by changes in Chinese customer demand.

Some bank economists have already lowered GDP growth expectations for the March 2020 quarter by more than 0.5 percentage points as a result of these disruptions. For now the effects seem to be primarily coming through economic channels, rather than interest and exchange rates in financial markets.

With this context in mind, it is important to recap some of the key channels through which regional economies are being affected.

These effects are in response to both changes in Chinese customer demand, as well as measures by governments globally to curb travel to, from, and through China:

  • The New Zealand Government has temporarily restricted the entry of all foreigners who have travelled from or through mainland China. New Zealand’s hand has been forced by travel restrictions by other countries’ responses, like Australia and the US and it is hard to see the ban being lifted again anytime soon.
  • Back-of-the-envelope calculations suggest the reduction to international visitor numbers to New Zealand post-ban could exceed 10%. This estimate is based on Chinese visitor restrictions only and does not take into consideration risk-averse visitors from other countries delaying or cancelling travel, which could push the end effect higher.
  • Travel restrictions have severe ramifications for international education. Although many school-aged Chinese students will have made it into the country prior to the start of the school year, the same cannot be said for tertiary students whose academic year begins later and are now not able to travel from China. One third of international tertiary students in New Zealand come from China.

Aside from visitor and study related considerations, there is also increasing evidence from exporters that demand has dried up for some of New Zealand’s exports to China.

  • Chinese consumption patterns have changed dramatically in the wake of the outbreak, as a result of less socialising and a disruption to the working environment.
  • For New Zealand, this has meant a complete halt to fresh crayfish and flower exports.
  • Export prices for meat, mainly beef and mutton, have fallen sharply. China is New Zealand’s biggest export market for beef and mutton, with most of the meat destined for consumption at local hotpot restaurants where demand has fallen as people stay home.
  • The effects on dairy exports are expected to be smaller. Dairy consumption in China is driven less by socialisation, and more by practical needs such as in infant formula.
  • Timber exports are expected to slow as construction growth in China is likely to slow during the outbreak, while activity at Chinese ports is also constrained.
  • For some regions with smaller primary sectors some of these direct export channels may be small. But the indirect effects on service towns and cities must not be overlooked if farmers become more reluctant to spend. Businesses affected in this situation could include those in wholesale trade, logistics, consulting and contracting services to the agricultural sector.

Over the coming weeks, it will be important to watch upcoming business confidence indicators for a sense on whether the novel coronavirus outbreak is affecting the mindset and hiring/investing intentions of corporate New Zealand. For similar reasons, continuing to follow commodity price data will help paint a clearer picture for how the outbreak is affecting global markets.

Even in the case where the health effects remain largely contained within China, there is still likely to be several months at least where the crisis continues to be a drag on the global economy and consequently businesses within regional New Zealand.