Economic Update - March 20


by Nick Clark

A week of it…

We all know the old and over-used saying “a week is a long time in politics” but the past week has been an eternity when it comes to coronavirus, with dramatic responses which will have long-lasting impacts on New Zealand and indeed the world. 
Since the outbreak of the virus, global trade, travel, and business and consumer spending have been curtailed, first in China and then much more widely to become a global pandemic.  Although it took time to sink in financial markets responded putting share prices, interest rates and currencies in turmoil.
Last week it was dawning on us all that the outbreak and associated economic downturn were both far more serious than initially thought.  Italy’s belated lockdown and he US decision to cease air travel between it and Europe was probably the biggest single shock wave and then more and more countries began restricting travel and person-to-person contact.
Here in New Zealand, despite a relatively low number of positive tests our Government came under increasing pressure to take a stronger approach.  We saw the cancellation of two big public events, the Pacifica Festival and the Christchurch Mosque shootings commemorations, followed quickly by tough travel restrictions forcing all international arrivals to self-isolate for 14 days. 
This was a hammer blow to an already slowing tourism industry, and the businesses, workers and communities reliant on tourism.  With economists predicting a long and deep recession, the Prime Minister promised a dramatic economic package to support affected businesses, workers, and the economy.  All this before the weekend was over.
First thing Monday morning the Reserve Bank delivered an emergency 75 basis point cut to the OCR, taking it to just 0.25% where it will stay for at least the next 12 months.   It did not mince words saying “The negative impact on the New Zealand economy is, and will continue to be, significant. Demand for New Zealand’s goods and services will be constrained, as will domestic production. Spending and investment will be subdued for an extended period.”
The next review of the OCR is scheduled for 13 May, although it could move sooner.  Rather than further cuts to the OCR into negative territory the Reserve Bank will more likely deploy large-scale asset purchases (i.e., quantitative easing), buying up domestic government bonds to lower interest rates and contribute to a flattening of the yield curve.
The Government also advised on Monday that gatherings and events of 500 or more people should be cancelled.

 On Tuesday came the Government’s $12.1 billion rescue package, a massive fiscal stimulus amounting to 4% of GDP, much bigger in GDP terms than those in Australia and the UK.  The key elements are:

  • A wage subsidy for all coronavirus-impacted businesses, costing an estimated $5.1 billion.Full-time workers eligible for the package will receive $585 per week from the Government, paid in a lump sum package of just over $7,000 covering a 12-week period.
  • Raising benefits by $25 a week, starting 1 April 2020 (permanent change), and doubling the Winter Energy Payment (for this winter only). These will cost $2.8 billion.
  • Tax changes to free up cash flow, costing $2.8 billion.These include
    • Reinstatement of depreciation deductions for commercial and industrial buildings, including for seismic strengthening, at 2% (permanent change).
    • Provisional tax threshold increased from $2,500 to $5,000 (permanent change).
    • Writing off interest on late payment of tax allowing IRD to remove use of money interest for any tax debts incurred after 14 February, including provisional, PAYE, GST, if the business has been significantly impacted by coronavirus (for 2 years).
    • Immediate deductions for low-value assets up to $5,000 (for a year, then $1,000 thereafter).

       

  • $500 million boost to health spending
  • $600 million to support the aviation sector
  • $100 million redeployment package

This is just the first tranche of the Government spending response – the rest will be unveiled in the "recovery" Budget on 14 May.
The Government will borrow big to fund the rescue package.  Thanks to responsible fiscal policy from successive governments under both red and blue teams, government debt is low and there is plenty of room to move.  Borrowing rates were also very low at around 1% for 10-year government bonds, although they increased sharply following the announcement – to 1.6% as of Thursday.  For those who want an easy to read explanation see this Stuff article.
Federated Farmers supported both the Reserve Bank’s stimulus and the Government’s rescue package.  Put together they were a decisive and pragmatic approach to a fast-moving unprecedented public health and economic crisis.  Rather than spread money thinly across all households and businesses, the Government decided to throw the kitchen sink at directly affected businesses and workers and the most vulnerable.  Fair enough.
The market reaction to the announcements was positive and we very much hope the rescue package works.  However, even the Minister of Finance acknowledged it won’t stop a recession and more action will be needed especially if the situation worsens even further – as seems increasingly likely.  The Reserve Bank’s review next scheduled review on 13 May and the Budget on 14 May will be a crucial double-header.
And on Thursday the Government announced that gatherings of 100 or more people indoors should be cancelled, except for workplaces, schools, supermarkets and public transport.  It then followed up by imposing a ban on all international arrivals, except for returning New Zealanders.
As well as its monetary and fiscal policy responses and its restrictions on arrivals and gatherings we also think the Government needs to reconsider, slow down, or soften its policy and regulatory initiatives, many of which have been and will continue to cause great stress and uncertainty for businesses and farmers.  Councils also need to put a firm lid on their proposed rates increases for the coming year.
The Reserve Bank showed the way on Monday deferring its tougher bank capital requirements by 12 months to enable the banking sector to support households and businesses and also slowing down or delaying other regulatory initiatives.  The Government should follow suit to foster a durable economic recovery.
This week has been huge.  What will next week bring? 

Onto the week’s other economic news…

GDT down…again
Dairy prices were down again at this week’s GDT auction, losing 3.9%. The fall was driven by slumps for the two biggest commodities by volume, whole milk powder (down 4.2%) and skim milk powder (down 8.1%).  The other five commodities with information available all posted rises.
Overall, the average selling price was $US2,980 and 24,209 tonnes were sold.
Encouragingly there was a pickup in the demand from North Asia (including China), but demand was weaker from other markets.
The GDT Price Index is down 12.0% over the past four auctions since late January and is down 13.0% on the same time last year.  Thankfully the sharply lower exchange rate will help offset the lower global prices, providing some support for the farmgate milk price.

Fonterra’s interim result
Fonterra released its interim results for the first half of the 2020 financial year:
Total group normalised Earnings Before Interest and Tax (EBIT) was $584 million, up from $312 million, while net debt was down by $1.6 billion to $5.8 billion.
Full-year forecast earnings remains unchanged at 15-25 cents per share and the forecast Farmgate Milk Price range remains unchanged at $7.00-$7.60 per kg MS.  A milk price in that range would be very good in the current economic climate.
However, although this is a good result Fonterra’s board decided not to pay an interim dividend due to concerns about the impact of coronavirus on second-half earnings.

Farm sales and prices down
Farm sales have continued their decline, according to the Real Estate Institute of NZ’s Rural Market Statistics.  
There were 329 farm sales in the three months ended February 2020, down 11.1% on the same three months last year.  For the year to February 2020, 1,253 farms were sold, down 14.8% on the previous year.  Dairy farms were down 37.0%, grazing farms down 10.0%, finishing farms down 27.9%, and arable farms down 9.9%.
The median price per hectare for all farms sold in the three months to February 2020 was $20,569, down 8.4% on the same three months last year.  The REINZ All Farm Price Index, which adjusts for differences in farm size, location and farming type, was also down 13.7% in the three months to February 2020 compared to the same period last year.
REINZ observed extreme pressure being placed on farmers and the rural property market from drought and restrictive lending by banks.

Growth slowing
The economy grew 0.5% in the December 2019 quarter, according to Statistics NZ’s Gross Domestic Product statistics.
Quarterly growth for agriculture, forestry, and fishing came in at 0.2%.
Comparing the December 2019 quarter with the December 2018 quarter, GDP was up 1.8%. For agriculture, forestry and fishing it was down 0.2%.
Annual growth for the year to December 2019 was a bit stronger at 2.3% and for agriculture, forestry and fishing it was a lot stronger at 3.7%.
After peaking at 3.9% in December 2019, annual GDP growth has been steadily slowing for the past three years.  The coronavirus will weigh on the current March quarter and the full effect will be felt in the June quarter.

Balance of Payments
New Zealand’s current account deficit narrowed in the December 2019 quarter according to Statistics NZ’s quarterly Balance of Payments and International Investment Position Statistics.
The current account deficit for the year ended December 2019 was $9.2 billion (3.0% of GDP) down from the $11.4 billion deficit for the December 2018 year (3.8% of GDP).
As at 31 December 2019 New Zealand’s net international liability position was $170.9 billion, down from $171.2 billion at 30 September 2019.
The current account may widen from here as the economic downturn unfolds.  This is due to the significant blow to export industries already underway (especially tourism), although there will be offsetting factors such as the lower exchange rate, reduced imports, and a slump in New Zealanders travelling overseas.

Food prices flat in February
Food prices were flat in February according to Statistics NZ’s monthly Food Price Index. After seasonal adjustment, they were up 0.3%.

In February 2020 compared with January 2020:

  • Fruit and vegetable prices fell 0.7% (down 1.1% after seasonal adjustment), with fruit down 2.5% but vegetables up 0.8%;
  • Meat, poultry, and fish prices fell 0.6%, with beef & veal down 0.1% and mutton, lamb and hogget down 2.2%; and
  • Grocery food prices rose 0.6% (up 0.8% after seasonal adjustment), with bread & cereals up 0.8% and milk, cheese & eggs up 1.0%.

 On an annual basis, comparing February 2020 with February 2019, food prices were up 3.1% with:

  • Fruit and vegetable prices down 0.3%, with fruit up 3.4% but vegetables down 3.3%;
  • Meat, poultry, and fish prices up 6.1%, with beef & veal up 5.8% and mutton, lamb and hogget up 5.5%; and
  • Grocery food prices up 3.6%, with bread & cereals up 4.6% and milk, cheese & eggs up 6.0%.

Visitor numbers up in January
Overseas visitor arrivals were up 11,400 to 410,800 in January 2020 compared with January 2019, according to Statistics NZ’s monthly International Travel Statistics.
Meanwhile, for the January 2020 year, the number of visitor arrivals was up 16,600 (or 0.4%) to 3.90 million.
The earlier than usual timing of Chinese New Year helped increase month-on-month visitor numbers from China, Hong Kong and Taiwan.  However, Chinese visitors were still down 41,000 on an annual basis after falls throughout 2019, before coronavirus reared its ugly head.
This will likely be the last bit of not-so-terrible news for tourism.  Visitor arrivals will be down sharply in February with the travel restrictions on Chinese arrivals imposed at the start of that month and they’ll slump further in March with the widespread travel restrictions announced last weekend.

NIWA Soil Moisture Data
NIWA’s latest soil moisture maps (as at 9am Thursday 19 March) show little relief from the drought with soils continuing to be very much drier than usual across the whole North Island, the top of the South Island, and extending into Canterbury.  Otago and Southland’s soils are relatively average for this time of year though.


Exchange Rates

The NZ Dollar had a roller coaster week and was hammered on Thursday, falling sharply across the board.  It ended the week well down against the TWI and against most our key trading partners.  The exception was the Australian Dollar, where it was up for the week, and the UK Pound where it ended the week almost unchanged.

 

 

NZ Dollar versus

This Week

(19/3/20)

Last Week (12/3/20)

Last Month (19/2/20)

Last Year (19/3/19)

US Dollar

0.5640

0.6260

0.6398

0.6844

Australian Dollar

0.9854

0.9674

0.9562

0.9643

Euro

0.5173

0.5554

0.5925

0.6037

UK Pound

0.4874

0.4883

0.4922

0.5161

Japanese Yen

61.37

65.49

70.32

76.17

Chinese Renminbi

3.9627

4.3503

4.4816

4.5939

Trade Weighted Index

65.79

69.89

71.40

74.28

Source: Reserve Bank of NZ

 

Wholesale Interest Rates

Over the course of the week the 90 Day Bank Bill interest rate was down 21 basis points to just 0.69% but the rate for 10 Year Government Bonds leapt 62 basis points to 1.63%.  This surge was in response to the Government’s announcement that it will be borrowing big for its rescue package. 

 

The OCR is scheduled to next be reviewed on 13 May, but the Reserve Bank could be pushed to advance plans for large scale asset purchases to take pressure off Government bond rates.

 

 

This Week

(19/3/20)

Last Week (12/3/20)

Last Month (19/2/20)

Last Year (19/3/19)

OCR

0.25%

1.00%

1.00%

1.75%

90 Day Bank Bill

0.69%

0.90%

1.17%

1.88%

10 Year Government Bond

1.63%

1.01%

1.33%

2.06%

Source: Reserve Bank of NZ