NZ economy in strong position to respond to coronavirusFinance
Prepared remarks on coronavirus by Finance Minister Grant Robertson to the Auckland Chamber of Commerce and Massey University.
Good morning ladies and gentlemen,
The topic of this speech is the Budget 2020 priorities. But, given the considerable interest that I imagine is in the room about COVID-19 coronavirus, I do want to make some comments about that first.
Because we do meet today in the shadow of one of the biggest uncertainties that the global economy has seen in recent times.
This is a rapidly changing situation that the world finds itself in.
This week we have seen stock markets react to news of the virus spreading.
Just overnight, the World Health Organisation reported there were more new cases recorded outside China than inside it.
I am going to spend a bit of time outlining what we are doing to respond to coronavirus, and how we are planning for a range of scenarios so that we are prepared and able to support the New Zealand economy as the global impact of the virus becomes clearer.
First and foremost, our response to coronavirus must be led by our responsibility to protect the health and wellbeing of our people. That is why our first response has been a public health response.
The Ministry of Health has done significant work over recent years on our pandemic planning and response. That means we are in a position to deploy that plan if this virus outbreak spreads and cases reach New Zealand.
The Ministry is working closely with DHBs, public health units, general practitioners and other health providers, including holding daily teleconferences on emerging issues.
The Prime Minister earlier this week set out some of that work. This includes even the level of detail of having 9 million P2 masks, and 9 million general purpose surgical masks available.
We’ve initiated an intensive care network of clinical ICU directors. We’ve undertaken a national stocktake from DHBs, which shows that we can deploy new staff across ICUs and high-dependency unit beds around the country.
We have access to negative pressure rooms across 15 DHBs, and New Zealand has the ability to test for the virus in Auckland, Christchurch, and Wellington, with same-day turnaround.
As you know, we’ve also put in place the travel ban on people who have left or transited through mainland China in the previous 14 days. We continue to review that ban every 48 hours, including taking into account the spread of the virus to other countries.
Public health staff are at our international airports, providing advice and information, and they are available to undertake health assessments of passengers.
That information includes guidance on self-isolation. Since early February there have been more than 5,000 registrations of people in self-isolation. I want to take a moment here to thank New Zealanders for showing that kind of responsibility.
Healthline has established a dedicated phone line for coronavirus information – 0800 358 5453.
It is, of course, welcome that we have not yet had a case of coronavirus in New Zealand.
The advice from health experts is that, with an outbreak of this type, it remains a high probability that we will have a case at some point. But I want to congratulate our public health officials on their response.
What it has done is buy us some time to prepare ourselves should a case arrive.
Beyond the public health response, we are taking a whole-of-government approach to managing the outbreak and planning for further scenarios.
A key part of this is our planning for the economic impacts of the virus.
As we do this, we know that this Government’s economic plan has been strengthening and growing the economy, even in the face of the global headwinds we have faced over the past two years, like the US-China trade war and Brexit uncertainty.
We go into this situation with the economy in good shape. We are in a strong position to stand up to the economic and health impacts of coronavirus.
Looking across fiscal and monetary policy, our labour market, consumer and business confidence readings and our housing market, the economy showed solid signs of improvement in late 2019.
The Government’s accounts for the first six months of the fiscal year – to the end of December 2019 – were strong. We had a surplus over the first six months of our fiscal year and we’re sitting $500 million higher than expected due to the stronger economy. This is on top of the $12 billion of surpluses in our first two years in Government. Tax revenue, including corporate tax and GST, were running ahead of forecast – highlighting the underlying strength of our businesses and our economy.
Just yesterday, the New Zealand Institute for Economic Research reported how the fundamentals of the economy are still strong, saying “there is underlying momentum in the economy”. This was off the back of higher consumer and business confidence, and following the announcement of the Government’s significant infrastructure plans, which will boost domestic economic activity.
We go into this with our unemployment rate having ticked down to 4%. Just last week, Australia’s rate ticked up to 5.3%.
We go into this with our official interest rate higher than many other advanced economies – our Reserve Bank’s OCR at 1% is above Australia and the UK at 0.75%, and there are negative rates across Europe.
We go into this with very low Government debt compared to the rest of the world. Credit ratings agency Moody’s recently reported that New Zealand’s Government debt position is significantly lower than other countries with its top Aaa rating.
And we go into this situation off the back of our Government’s announcement of additional infrastructure investment in roads, rail, schools and hospitals under the New Zealand Upgrade Programme. We are investing to support, grow and modernise our economy.
New Zealand is in a strong position to respond to the impacts of coronavirus.
We are operating in an environment of high uncertainty. It is not possible for anyone at this stage to give definitive answers to significant questions, such as: How long will it last? What will the global reach be? How deep will the impact be felt?
But while we look for answers for those questions, we can say some things with certainty.
This will have a serious impact on the New Zealand economy in the short term.
It is clear that there is an immediate impact on the tourism industry, particularly given there are now very few flights between China and New Zealand.
Chinese tourists typically spend around $180 million per month in the peak travel months of January through to April.
Within education exports, our tertiary sector has been impacted due to foreign students not travelling. The estimates we have are that around 40% of students have not been able to travel here.
That’s why we are working closely with our tertiary education sector to see what they can do to make sure New Zealanders’ public health isn’t put at risk if the travel ban is lifted for students.
It is obvious that if the docks in China are shut down because workers are not able to get to work, then this will impact New Zealand’s log and food exports. Although I will add that we are starting to hear reports of some shipments getting through. Chinese authorities are also prioritising food shipments into China, which is positive for a country like New Zealand.
We also know that the supply chain disruption in China is having some effects here in New Zealand, where domestic companies rely on imports from China that are not moving at this time.
Very early, we began speaking to industry groups about how we could help them respond to the initial impacts of coronavirus.
This week, Minister Davis and I held a meeting with leaders from the tourism industry regarding the $11 million fund we set up to help identify new markets and opportunities as visitor numbers from China remain low due to the public health travel ban.
At that meeting we agreed to establish a tourism industry advisory group to ensure a continuous flow of information between the industry and the Government.
We also agreed on the importance of working together to rebuild the Chinese market from a New Zealand Inc. point of view once restrictions are lifted.
In terms of Government departments, MSD and IRD are working closely with affected businesses and individuals to make sure they receive the support they need.
The most recent numbers show the IRD has spoken directly with more than 100 businesses to give them advice and support.
An MBIE website at business.govt.nz has been set up as a dedicated resource for businesses to source information about a range of potential issues like where exporters can go for assistance, implications for landlords and tenants, issues around tax obligations and questions around planning for travel.
As of yesterday, there had been 45,000 hits on the site – so it’s good to see information flowing between Government and businesses.
Minister Stuart Nash moved quickly to help our live rock lobster industry with a set of common sense changes to rules that he oversees to help them manage their stocks after it became difficult to export to China.
It is important to keep in mind that this outbreak will end, just as we saw with other outbreaks like SARS. The question is a matter of, when that will be?
New Zealand’s economy is in a strong position to respond to coronavirus. We are well prepared to respond to a range of scenarios that could play out.
Current analysis of the economic impacts of coronavirus from various forecasters has focussed on a scenario where the virus is contained and there is a short, sharp impact on the global economy in the first half of 2020, before activity returns to normal levels.
Over the weekend, the IMF downgraded its China growth forecast for 2020 from 6% to 5.6% under a scenario which assumes the spread of the virus is contained. The impact on global growth from this would take it from 3.3% in 2020 to 3.2%.
The OECD publishes its next set of interim forecasts next week, which will contain further updates.
The IMF’s Managing Director did say they are looking at further scenarios where the spread of the virus continued for longer, was more global, and had more protracted global growth consequences.
This is similar to what we are doing here in New Zealand, through an Economic Advisory Group led by the Treasury and including the Reserve Bank and MBIE.
Through this, we are assessing three scenarios:
- Scenario one predicts a temporary global demand shock where we experience a temporary but significant impact on the New Zealand economy across the first half of 2020, before growth rebounds in the second half as exports return to normal.
- The second scenario is based on a longer lasting shock to the domestic economy, as the global impact feeds through to the economy for a period of time, and where there are cases in New Zealand, and,
- The third scenario is planning for how to respond to a global downturn if the worst case plays out around the world, and we have a global pandemic.
We believe it is sensible and responsible to plan for these multiple scenarios.
It does not mean we are predicting them. But it means we can continue to act swiftly and decisively as the impacts of coronavirus on the global and domestic economies become clearer, so that we can support Kiwis and New Zealand businesses.
This week NZIER released a piece of research showing they expect a “short, sharp shock”, with the effects expected to be temporary – in line with what I’ve outlined in scenario one, where containment works.
But it is important to note that NZIER said that if its assumption around containment does not hold, then there would likely be a larger impact on export demand, meaning weaker GDP growth in the New Zealand economy.
This is a rapidly changing situation that the world is in. You would have seen this week global stock markets reacting as new reports about outbreaks in places like Italy, South Korea and Iran hit the headlines.
This does raise questions around whether the first scenario – that there will be a short, sharp impact over the first half of 2020 before activity returns to normal – will play out, or whether we are already heading to the second scenario where there are longer-run impacts.
Our officials here are actively monitoring this situation, drawing on all data and analyses that they can to adjust our assumptions and forecasts.
This includes administrative data that might provide more timely signals than traditional economic indicators which are reported with a lag.
It also includes high-frequency data from China that economic analysts around the world are keeping tabs on – ranging from coal consumption to air pollution levels and traffic jams in Chinese cities to monitor activity there.
We are in a good position to handle the situation, however it develops.
The second scenario we are planning for has the domestic economy experiencing a longer period of slower growth – across the whole of 2020 – as a result of the global effects of coronavirus.
Under this scenario, global uncertainty about the worldwide spread and containment of the virus causes deeper impacts on directly exposed sectors, as our trading partners feel the effects of coronavirus.
We would expect to experience a decline in visitor arrivals from other markets outside of the temporary travel ban due to the economic impact that the virus has in other countries – like what we’re seeing now with South Korea.
These external effects lead to broader indirect impacts across the domestic economy, with business and consumer confidence falling and the subsequent impact on investment and spending decisions.
I do want to also briefly talk about scenario three. Effectively, scenario three is one where the virus outbreak becomes a global pandemic that in turn creates a global downturn or even a global recession.
In such circumstances it may be necessary to consider immediate fiscal stimulus to support the economy as a whole and businesses and individuals through this period.
I hasten to add that we are not predicting this scenario. But we are doing the planning for it. I also remind you that these scenarios are all temporary. The effects of this virus will pass.
We are in a strong position to handle these scenarios.
We have low public debt. We have been running budget surpluses, and we have forecast budget surpluses because we’re managing the Government’s books carefully.
We know that Kiwi businesses are performing well, as we see record-low unemployment numbers, a greater proportion of small businesses with positive cash flows, and higher-than-forecast corporate tax revenue.
The automatic stabilisers will also kick in:
- In this scenario, the New Zealand dollar is likely to depreciate, which will help our exporters.
- The Reserve Bank has noted publically that it has room to move if the situation deteriorates – and it is worth remembering that they have greater room to move than most of their peers.
- MSD is already actively on the ground assisting workers in the forestry and logging sectors, while IRD is actively in discussions with businesses about provisional tax arrangements.
These and other Government agencies are set to step up their efforts as needed. I have asked the Treasury to provide further specific policy interventions for each scenario.
As we move through our planning and response as a Government, I also urge New Zealand’s banks and their customers to sit down together and talk through their plans for managing the impacts of the virus on their business.
And also for businesses to talk with their staff about any adjustments that might be necessary.
Because we are all in this together.
We are lucky in New Zealand that we are able to move swiftly and decisively due to our careful economic management.
Our management of the Government’s books means we have the room to support the economy further through targeted Government investment.
You’ve already seen examples of sector-based initiatives that we’ve been able to get underway quickly, in tourism and fisheries.
Further sector-specific initiatives are able to be rolled out to support businesses and New Zealanders through this period if the second scenario that we are planning for does play out.
We are also at a stage in the 2020 Budget process where we can consider the policies required if we need a greater response.
So, in summary, we are continuing to focus on protecting the health of New Zealanders and we are taking a public health approach to our response to coronavirus.
At the same time we are undertaking whole-of-Government planning, working with sectors and industries to ensure we respond as this situation evolves.
We have the capacity and ability to do what it takes.