Speech to the Wellington Chamber of CommerceFinance
Thank you to the Wellington Chamber for hosting us here this morning.
When this event was first organised the focus for my contribution was going to be to look at some of the longer term issues and opportunities facing the New Zealand and Wellington economies, and I will still briefly touch on them, but for reasons that you will all understand I am going to focus my comments today on the Government’s planning for, and response to, the economic impacts of the COVID-19 coronavirus outbreak.
It’s important to remember at the outset that this is first and foremost a public health issue. It is also the case that the best and first way to protect the economy is by containing the spread of this virus.
People’s health remains our top priority. We’ve acted swiftly and decisively to keep New Zealanders safe, putting in place extra border controls, requiring higher risk travellers to self-isolate in accordance with expert medical advice, and scaling up health staff at airports to check passengers arriving on international flights.
A critical element for countries who have been able to manage the spread of the virus remains contact tracing. For the five cases that we have had so far we have traced 100% of the close contacts they have had while carrying the virus. That will be a tough percentage to keep up as we have more cases but it must continue to be our goal.
The other part of our response that is working well is self-isolation. Well over 8,000 New Zealanders have self-isolated. This kind of personal responsibility is essential to containing the virus. New Zealanders should be proud of their response in this regard.
Simple but effective actions like washing your hands properly, sneezing into the inside of your elbow, and staying away from work or public events if you’re sick are vitally important.
For both the public health and economic response this is not just a government response or a business response. It must be a New Zealand response. We are all in this together and we will get through this.
New Zealand has a world-class health system and we’re well-prepared to keep New Zealanders safe. The declaration today by the World Health Organisation of a global pandemic changes little about New Zealand’s response. Our Pandemic Plan has been operational since the beginning of the year. It gives us the framework to manage the different phases of this kind of situation. We have the medical supplies, the access to specialist facilities and the workforce to guide us through the coming months.
The increased investment we have made in our health system over the last two Budgets sees us facing this situation with improved confidence in the resilience of our health sector. I have made clear to the Minister of Health that there is no question here about resources. We will do what it takes to keep our people healthy and safe.
There will no doubt be bumps along the road, but we’re taking expert advice, and making decisive calls in the best interests of New Zealand and New Zealanders.
This is a rapidly evolving situation and while there is much uncertainty about the COVID-19 outbreak, it is clear that it is going to impact the world economy, and therefore New Zealand's economy, for all of 2020.
As we know from events like the global financial crisis and the Canterbury earthquakes, New Zealand is not immune to economic shocks that are beyond our control.
However, this situation is very different to other challenges the New Zealand economy has faced in the past decade.
We need to remember that this is not a structural economic problem, nor a natural disaster.
The Canterbury and Kaikōura earthquakes were events that impacted defined areas, where it was clear which businesses were affected, why, and how.
Through the GFC we saw structural issues that nearly led to the collapse of the global financial system.
With COVID-19, which is an evolving, global health crisis, we are seeing different businesses in the same industries and in the same regions impacted differently.
For some this is a supply problem, which may be short term as China begins to return to a sense of normality. For others it is a demand issue driven by a severe reduction in tourism or the phenomenon of social distancing.
But this is a not a about a fundamental weakness in the New Zealand economy. It therefore requires a tailor-made response, not wholesale changes and knee jerk reactions.
We are focussed on supporting the wellbeing and livelihoods of New Zealanders and their businesses through this difficult period, so that when the economy recovers we are all in a strong position to bounce back.
While the Government has an important leadership role to play throughout this time, it is up to all New Zealanders and businesses to do their part as well.
Our position going in
Before I run through the next phases of our economic response I do want to begin by restating the strong position New Zealand has in going into this global health crisis.
We go into this situation with the economy in good shape.
The economy showed solid momentum 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, sitting $500 million higher than expected due to the stronger economy.
Tax revenue, including corporate tax and GST, were running ahead of forecast – highlighting the underlying strength of our businesses and our economy.
We saw both consumer and business confidence lift higher through the end of 2019.
We go into this with our unemployment rate having ticked down to 4%. By contrast, Australia’s rate has ticked up to 5.3%.
Wage growth was around decade highs in the December 2019 quarter at 3.6% - well above inflation.
On Tuesday, we saw Stats NZ data showing the total volume of manufacturing sales had its strongest quarterly rise in six years in the final quarter of 2019, up 2.7 percent.
And last week we saw data showing the terms of trade hit a record high in the December quarter.
We go into this with our OCR higher than many other advanced economies, and therefore more room to move if the Reserve Bank Monetary Policy Committee decides to do so.
We have had $12 billion of surpluses in our first two years in Government, and are forecast to have further surpluses across the forecast period.
And of course, we have very low Government debt compared to the rest of the world. At 19.5% of GDP as at the end of January we are well below the 22% that we inherited from the previous Government. 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.
As our friends in Australia look to boost infrastructure, we have already got ahead of the curve with the announcement of our $12 billion investment in infrastructure through the New Zealand Upgrade Programme.
This will continue to support growth long after the impacts of coronavirus have worn off, by making targeted investments around the country, creating jobs and supporting businesses and local communities.
All of this demonstrates the solid underlying momentum of the New Zealand economy at the end of 2019, which has us in a strong position to respond now to the uncertainty that we face.
Where we are now
As we all know, the effects of COVID 19 are already being felt and will continue to be so. In a rapidly evolving situation we have used three scenarios to guide our planning and our response.
As I have previously outlined, scenario one predicted a temporary global demand shock where we experienced a short sharp shock on the New Zealand economy across the first half of 2020, before growth rebounded in the second half as exports return to normal.
It is clear that we moved beyond that over the last couple of weeks to be firmly in to scenario two with a longer lasting shock to the domestic economy, as the global impact feeds through to the economy for the whole of 2020, and where there are cases in New Zealand. That is the phase we are in and where we are deploying our plan to target those workers, businesses and industries most affected.
The third scenario that we are planning for is to respond to a sustained global downturn, if that were to occur.
In terms of China the impact has been huge. China’s manufacturing PMI fell from 50 in January to just 35.7 in February, its lowest level on record. The non-manufacturing PMI fell from 54.1 to 29.6.
Higher frequency data on Chinese activity is showing that there has been some improvement, but the economy continues to operate at a greatly reduced capacity.
In other countries the spread of the virus has been dramatic in places such as Italy. South Korea and Iran. It is in every corner of the globe.
We can see these global impacts playing out across various sectors and locations around New Zealand.
Data from Customs shows that Chinese arrivals between 1 February and 9 March were down 80% compared to the same period in 2019. New Zealanders also appear to be travelling a little less, with departures down 5% over the same period.
Experimental data from Stats NZ indicates that exports to China have declined in the last 6 weeks or so, particularly in forestry and seafood, although the dairy sector is proving resilient and appears to still be seeing export growth.
While other export markets have held up there will clearly be an impact should further restrictive actions be taken, such as Italy’s nationwide containment measures.
We have started to see the employment impacts resulting from this economic disruption, particularly in forestry in Tairawhiti. And in the Tourism and Hospitality sectors effects are showing now, and forward bookings have dried up.
In other sectors and parts of the country the impacts are not as great, but naturally everyone is anxious.
These factors are all starting to flow through to economic confidence. On Tuesday ANZ released preliminary business confidence data for March, showing firms’ activity intentions at their lowest since June 2009. ANZ’s latest consumer confidence index for February eased just 1 point, however I expect this will come out weaker when we see the March index.
We are seeing this play out in the financial markets. The 90-day interest rate has fallen by around 40 basis points since the start of the year.
Global stock markets are well down on the start of the year and remain volatile.
So that is a brief summary of where we are at. Of course this situation is rapidly evolving and we are constantly seeing new developments.
What we are doing immediately
As you know, we moved quickly to support particular industries that have been affected, including tourism and the seafood industry. We have boosted funding for business advisory services, instructed government departments to pay their bills within 10 days and removed the stand down period for workers who lose their jobs.
Inland Revenue and MSD are supporting businesses and workers on issues like provisional tax readjustments, remission of late payment and filing fees, wage instalment plans, and income support.
MSD's rapid response teams are in place in regions like Tairāwhiti, and we have removed the stand-down period.
I have been talking regularly with business groups, unions and individual business owners over the last few weeks. As I said earlier, we are all in this together.
Banks have stepped forward to provide an assurance that they will work with their customers to get through this difficult time. They have committed to working with affected customers, are reducing or suspending principal payments on loans and temporarily moving to interest-only repayments, helping with restructuring business loans, consolidating loans to help make repayments more manageable, providing access to short-term funding, and referring individual customers to budgeting services.
I want to reiterate the importance of conversations now between banks and customers as the first port of call.
I want to thank businesses who have remained accommodating and flexible as they can around issues like sick leave, and I want to thank Business NZ and the CTU for their help in preparing advice on these issues which is available on the employment.govt.nz website.
The Government’s is now moving to the next phases of responses to potential further ongoing impacts of the coronavirus.
Any measures the Government takes must be:
- fiscally sustainable,
- targeted to those who need it, and
- proportionate to the level of economic shock.
Under these criteria, we are currently developing three further phases of response.
1. The Business Continuity Package
Early next week we will announce the details of the next phase of the Government’s economic response – our Business Continuity Package. This package is aimed at supporting cashflow and confidence, which are critical factors at present.
The Business Continuity Package includes:
- a targeted wage subsidy scheme for workers in the most adversely affected sectors
- training and redeployment options for affected employees, and
- working with banks on the potential for future working capital support for companies that face temporary credit constraints.
You will understand that a wage subsidy will have to have criteria and limits. It will also have to be tailor-made. We want to target the subsidies to those who are most affected and least able to adjust.
We are also working on adjustments to the tax system to support businesses to manage cashflow and support them to maintain employment.
And we are developing options to ensure that MSD can support individuals and businesses to provide temporary financial assistance and support to vulnerable individuals and families.
Further details of this package will be announced next week.
2. Preparing a macroeconomic package.
Should the economic impact worsen, causing a major, sustained global downturn, we are working on a further phase of measures to respond as necessary.
Under this scenario I have instructed officials to develop longer-term macroeconomic measures that may be required to support the economy, businesses, and workers if there is a major, sustained global downturn.
Such measures could include tax and welfare changes that support incomes and consumption, and help businesses stay afloat.
We want to make sure that this scale of intervention would not only support incomes but also our overall economic, environmental and social goals. We need to support improving our productivity and sustainability through, for example, training and education, supporting infrastructure and conservation projects.
Having managed the books well with surpluses and low debt, we are in a good position to be able to deliver these measures if we need to.
I reiterate that while we are planning for that situation, we are not predicting it, but planning for it is the responsible thing to do.
3. The Recovery Phase
The further piece of work we have directed officials to commence work on is the recovery phase.
As I have said, the economy will recover from this, so we need to ensure we are well-placed to bounce back strongly when we do.
I have directed officials to begin working on a package designed to support the entire economy as we come out the other side. Already, plans are under way to adopt an NZ Inc. approach to re-engaging with China. I would like to see this approach for other markets, and in other sectors.
The final shape of this package will obviously depend on the ultimate economic shock we feel from COVID-19. It will include measures to help us diversify our export and import markets – one of many lessons we will no doubt learn from all this.
As the global public health and economic situations continue to evolve, these phases of response will ensure that we are ready and prepared for the different eventualities New Zealand may face over the coming months.
All the while, the Government is continuing to focus on the implementation of our economic plan. While we are in the eye of the storm it is vital we push on with addressing the core challenges and opportunities for our future prosperity. Working to the goal of a more productive, sustainable and inclusive economy is even more important today than it ever has been.
I want to reiterate that we all need to work together in times like this. It is the Government’s role to provide leadership, guidance and to keep everyone updated on the facts, but all New Zealanders have a role to play in getting through this.
Scaremongering and knee jerk reactions are not what we need right now.
Our ongoing economic response will remain timely, targeted and sustainable. We will support Kiwi firms and families to make it through this shock so that they can bounce back on the other side.
While the economic impacts are very real, this is first and foremost a public health issue. The best way to protect the economy is to contain the virus.
So, wash your hands, cough or sneeze into your elbow, stay home if you are unwell. And look out for each other and show some kindness. That’s a Kiwi value at any time, but especially needed now.