NZ ‘in for prolonged hit’ from coronavirus

The ‘short sharp shock’ scenario is rapidly giving way to a more prolonged hit to growth.

Sharon Zollner ANZ chief economist

The likelihood the official cash rate could be cut next month to stem a potential recession resulting from the coronavirus outbreak is increasing, ANZ chief economist Sharon Zollner says.

‘‘The ‘short sharp shock’ scenario is rapidly giving way to a more prolonged hit to growth,’’ she said.

As the virus continued to spread globally, the human and economic knock on effects were becoming clearer, the bank economist said.

‘‘We’ve already seen an abrupt hit to our trade logistics with China. Goods exports were hit first, and while the situation at China’s ports is improving, it’s far from business as usual particularly for chilled and frozen product.’’

‘‘Tourism also took a hit immediately via the travel ban with China.’’

Zollner warned the longer the disruption continued, the greater the number of economic casualties there would be, as the pipeline for goods slowed down.

‘‘This could lead to a synchronised and persistent slowdown across domestic industries,’’ she said.

‘‘It is impossible to forecast its impacts accurately. But it’s very clear they aren’t going to be anything good. And it’s increasingly clear that they aren’t going to be brief.’’

OCR cuts would put downward pressure on the exchange rate, reduce financing costs for underpressure businesses and households, and aid confidence, she said.

The current official cash rate is 1 per cent.

Infometrics chief forecaster Gareth Kiernan said the chance of a rate cut was 50/50, but he said a Reserve Bank monetary policy statement from early February had been too optimistic, working on the assumption the coronavirus would be contained internationally by the end of February.

That hadn’t happened ‘‘by any stretch of the imagination’’.

If the Reserve Bank did cut the official cash rate, he tipped a cut of 25 basis points.

‘‘I wouldn’t expect a larger cut initially. The housing market has been showing increasing signs of life recently and they’ll be a little bit wary of stoking those fires too much.’’

More importantly, the drop in the exchange rate was already defacto loosening monetary conditions, mitigating drops in commodity prices for exporters, Kiernan said.

ASB senior economist Nick Tuffley agreed the likelihood of an interest rate cut was growing.

‘‘We could still be feeling the impact through to the middle part of the year,’’ he said, noting the number of cases that were now being reported outside of China was on the rise.

Containment measures would have knock-on effects for productivity and the disruption to supply chains would take some time to unravel, he said.

‘‘The real challenges will become more apparent over time. Even one simple item could bring some businesses grinding to a halt for a period.’’ Tuffley said.

The Reserve Bank had made it clear it saw Government as the more appropriate first responder. Cutting interest rates was not a precise way to help the forestry sector or workers being laid off, he said.