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BNZ economists caution that the hit to the NZ economy from our worsening Big Dry could be as bad as the impact from coronavirus and they say a recession is a 'very real risk'

BNZ economists caution that the hit to the NZ economy from our worsening Big Dry could be as bad as the impact from coronavirus and they say a recession is a 'very real risk'

BNZ economists are cautioning that the worsening drought conditions could have as much impact on the economy as the coronavirus and they say a recession is now "a real risk".

In the BNZ's weekly Market Outlook publication, BNZ's head of research Stephen Toplis says with all the current focus seemingly on the coronavirus, "we are concerned that folk are overlooking an economic driver in New Zealand that could, conceivably, have as least as much adverse impact on activity – namely, the deepening drought".

Toplis says past experience shows that a wide-spread drought can take 0.5 to 1.0% off GDP.

"We have already made adjustments to our outlook but we have been very conservative so far. The risks are clearly for a bigger effect than we are assuming."

He says to put matters into perspective, the potential drought impact is of a "similar magnitude" to that the BNZ economists are currently expecting for coronavirus.  "Similarly, we have been conservative in our coronavirus assumptions so far."

The country's major bank economists are all seeing a sizeable, but at this stage short-term impact on the economy from the virus, while the Reserve Bank also sees a short term hit, but of somewhat smaller magnitude.

Toplis says in regard to the drought and the coronavirus, what makes things worse is that the two issues "run headlong into each other to cumulatively exacerbate each other’s impact".

In particular, drought encourages an increased sheep and beef kill but, at the moment, the coronavirus has reduced demand for these meats, while secondly, drought reduces the supply of dairy products, which usually pushes the price up - but this is being offset by declining global commodity prices.

The first two quarters of 2020 are where the economy is most vulnerable to a technical recession, Toplis says. If the impacts of the coronavirus and drought were to approach the upper end of the BNZ economists' range of estimated impacts "then two quarters of negative growth [the technical definition of a recession] could, conceivably, be on the cards".

"From the market’s perspective, even our 'optimistic' scenario leaves us with a GDP growth profile that, in the short term, is much weaker than the RBNZ’s. Indeed, we were surprised that the Reserve Bank barely mentioned the drought in its forecasts. The word 'dry' appears once in the latest [RBNZ Monetary Policy Statement], 'drought' once (but in deference to other countries), and 'coronavirus' about 30 times."

Toplis says despite this, he's not calling for much easier monetary policy, because he's not yet convinced that the country's lower growth profile will lead to an unemployment rate that exceeds the top end of the RBNZ’s NAIRU (non-accelerating inflation rate of unemployment) range (4.1% to 4.7%) nor that it will push annual CPI inflation meaningfully below 2.0%.

"Moreover, if both the coronavirus and drought prove transitory then there is minimal cause for RBNZ action. And, to cap things off, we are still expecting, but have not built into our forecasts, significant further fiscal stimulus, which will probably be announced at the May Budget.

"Be that as it may, if our downside scenario eventuates then the pressure on the RBNZ to, at least temporarily, lower interest rates will rise. This being so, we believe the market is right to price in the real possibility of an [Official Cash Rate] cut this year even though we do not hold that as our central view. Currently the market sees around a 50/50 chance of a cut. We don’t see why it should move away from this stance any time soon.

"We reiterate that a recession is not our central forecast but it is a very real risk and we can’t stress enough that the drought may well, eventually, prove to be as important as the coronavirus. And we are concerned that it is being largely overlooked in much commentary."

Toplis says he's not expecting to see anything in the near-term data to support his downside fears for activity. "And we should point out, at this stage, that it often takes a very long time for Statistics New Zealand to identify agriculture downturns. For example, only recently did the statistical agency formally identify the drop in value-added in 2017 that we were all aware of at the time."

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Almost everyone is still thinking we are are in Feb 2019 and think it is business as usual.
I think part of this is the glossing over of all problems by the government and trying to portray New Zealand as some sort of economic powerhouse.
We have tourism and dairy as our main stars which judging by the above story regarding the big dry and coronavirus will be hit big time over next 6 months minimum.
I think if you are near retirement alarm bells should be ringing regarding possible hits to peoples/sheeples savings/investments.
We may soon see a run from baby boomers cashing up after such a great run on property and shares which could tank the market if everyone decides the game is over ???

I'm already cashed up waiting for the combined effects of the multiple Black swans to hit

Meanwhile Wolf has the real perspective from US

Yeah cashed up here as well and have decided that buying a house right now is not a good idea. Expecting things to get pretty bad over the next few months, the economy here is going to tank. Unlike the GFC you can see this one coming.

You have been around long enough now to know that bad news is good news for property prices. Drought and plague and pestilence mean the economy must be stimulated through the housing channel.

Old man Orr is just itching to dish out some of his trickle down medicine. The asset values will be protected at all costs.

"have decided that buying a house right now is not a good idea. Expecting things to get pretty bad over the next few months, the economy here is going to tank"

If there are many potential buyers like you, waiting on the sidelines, then that means there are likely to be fewer ACTIVE buyers in the market (i.e less effective demand). When there are fewer active buyers in the market place, and a large number of urgent, time constraints sellers, that is when prices can fall, as vendors have no interested buyers at their asking price. Only after prices have fallen, do these inactive buyers then become active buyers.

This is despite economists and property market promoters talking about a shortage in underlying supply of housing.

I am also all cashed up waiting for 2008 or even worse we will soon see.


Interesting listening. He lives in a nice part of San Fran. When you say "I'm already cashed up", what does that mean? Have you sold all your investments and if so when, or are you like me, just holding much more cash than normal? I am now at 17% of my total portfolio-shares and rental property- and will go to 20%.

Everyone knows what ADS is.

Check the last set of tourism numbers, group tours from China (2018). approx 32%+ of all china visitors.
See the planned growth, now not there as the tourist that come via ADS, are not allowed to leave china (any part of china).

Note: not sure there is only one reason for ADS program. Tourism nz say it's about quality of experience, never just one thing.

What's ADS?

My understanding is that “recessions” and the like have been successfully condemned to the past by Central Banks.

Just follow the simple instructions - "Lower the OCR and a timely pump of QE if necessary".

Further talk of “recessions” is to cease – nothing more than false scaremongering.

Unsure if this is a sarcastic comment made in jest, or is something that is really believed here.

Do people believe that recessions can no longer occur in New Zealand? i.e a zero percent probability of a recession occurring in New Zealand?

New Zealand's most recent recession was in 2009.

“Unsure if this is a sarcastic comment” – OK, just to be sure, it’s sarcastic.

“Do people believe that recessions can no longer occur?” – well, judging by their behaviour and conversations over the last few years – Yes.


Thank you for your clarification. Sarcasm can get lost in translation in written communication.

I know there are a bunch of people that believe that recessions can no longer occur. I saw a comment elsewhere from someone where they believe that property prices will continue to double every 10 years in future ...

Liked your comment at 4.44pm.

You present possibly the worst case scenario - but certainly one not out of the realm of possibilities.

I'm in various markets - but not leveraged - so can watch with a curious and academic interest.

If you are in the financial system, you are leveraged
Money is debt is wealth is leverage
Until it blows

True - but it's not the source of my cash-flow - and if it all blows up, what the....

But ultimately, it probably won't - because it simply can't.

ham n eggs,

"Money is debt is wealth is leverage" is meaningless.

"You present possibly the worst case scenario - but certainly one not out of the realm of possibilities."

These are a multitude of possible outcomes. It is the probability of an outcome occurring that is changing, given changing conditions and events.

For example, one possible outcome has always been that some contagious and infectious coronavirus could hit NZ. The probability at 31 December 2019 was low, given known events and conditions at the time (some thought that the probability was zero, which is clearly incorrect, given historical evidence of infectious diseases being transmitted across continents), that probability has increased given current conditions.

Take a look at the impact of the coronavirus infections on the economies of city states in Singapore & Hong Kong, as well as the rest of China outside Wuhan. Singapore has a lot of business travelers flying in and out which has resulted in a higher number of infections relative to the distance from the epicenter.

Don't worry folks.

According to neoliberal economics, all things are transmutable. At a certain price-point you just print water.

And tell the sun it's an externality.

Eleswhere, Japan GDP print for Q4 2019 was dreadful. Pre-coronavirus. Forward-looking, will be hard to see them staying out of recession if this data is not concoted in any way.

Don't worry - Jacinda and Simon have assigned a budget of $5 Trillion, of others peoples money, to change the global average temperature by 0.002 degrees C in 2100. Job done.

Thank God we have highly competent leaders like Jacinda and Soymon, spoilt for choice!

Contrast to the non cash "solutions" being proposed.

This means that all of us who are privileged enough to fly, for work or pleasure, have a role to play too, by:

1. reducing our flying (completely, or flying less)
2. carbon offsetting
3. for essential trips, only flying with airlines doing more to cut emissions

To really make an impact, far more of us need to do all three.

Susanne Becken is a Professor of Sustainable Tourism and Director, Griffith Institute for Tourism, Griffith University.

Question: is it true 33% of the population have no sense if humour?

“Scientist” means someone who contributes to the advancement of science by research. ... In a university, the top title that can be given to an academic is “Professor”, and professors engage in research and teaching...

"Aviation: There are no options for zero-emissions flight in the time available for action, so the industry faces a rapid contraction. Developments in electric flight may be relevant beyond 2050. "

With our PMI below 50, and been so for much of the past 6 months, our economy is contracting. The trend is certainly headed down.

When does Robertson's spending program kick off?

“The Government’s new capital expenditure, totalling $15.4b over five years, won’t meaningfully start getting out of the door until the year to June 2021 (IE $800m is expected to be spent in the year to June 2020).”

Not overnight that's for sure. It will take time to kick off construction on all their National RIP off projects...

Seems like the perfect storm is brewing.
Unfortunately it's going to be our productive rural and regional sector that is whacked much more than our ponzi urban economy.

Well, they could always lower their prices and sell it to Kiwis? Imagine milk $1 bottle...just saying

But than goverment gets less tax.

Not if the overall grocery spend remains the same? I.e. buying 2 bottles of milk instead of one...

And who will produce milk at $1 a litre?

Nobody for long

"For the year ended March 2019 just over 14 per cent of the work force was directly or indirectly employed in tourism. "

A) What are business owners of these tourism affected businesses going to do with a large loss in revenues and due to the fixed costs of some of these businesses, now become a cash drain, and negative cashflow?

B) How will these business owners continue to pay the cash drain?
1) existing cash reserves
2) asset sales - cars, boats, holiday baches, etc
3) loans (if they have adequate collateral which has low LVR - e.g home or investment property)

If the slowdown goes on for a long period, then cash reserves may run out, loans on property may reach high LVR's. Then the business owner may have little financial flexibility. If the business owner is currently highly leveraged, then they may already be in financial stress.

C) What happens to the employees who have lost their jobs (and who have large debt service payments, relative to their previous income on their homes)? The thing about the debt service ratio (debt service payment / household income) that most households don't allow for is, what happens if the denominator falls dramatically? Do they have financial resources to maintain debt service payments? or will they need to downsize and sell their house?
D) What happens to the employees who have lost their jobs (and who have debt service payments on their negative cashflow investment property)?

Then there are those export businesses which export to China ...

CN – you’ve boldly stated what I imagine many are thinking – but also thinking “surely not” - "can't and won't happen".

We have become so sanitised to what actually can happen, and previously has happened, that we really no longer imagine the worst.

Too many rescues have left us all feeling rather immune to financial misfortunes – the government and “authorities” will simply step in and apply the appropriate salve.

There, all fixed – much better now.

Thought it best to continue this thread and thought process here.

Second order effects
Many mum and dad investors with residential property portfolios have moved into commercial real estate in recent years due to higher gross rental yields, lower operating costs, and LVR's on commercial property being comparable to recent tightened LVR's on residential real estate. If businesses above are renting commercial space (such a retailers) and those businesses close down, what happens to commercial landlords who are highly leveraged and are unable to find a new replacement tenant?

If the commercial landlord loses their tenant (and rental income) and the property is unable to be tenanted, the commercial property investor may face cashflow stress.

1) how do they meet debt service payments on the mortgage on the commercial property ?
2) the lender may choose to lower the valuation of the commercial property real estate. As a result, the borrower may breach maximum allowable LVR's, and the bank may request a reduction of the mortgage to reduce the LVR. How does the borrower meet this demand for collateral or cash?

Commercial property is illiquid and may be unable to be sold in a recession at an acceptable price. If the commercial property owner also owns residential investment property, then they may choose to raise cash from selling residential investment property. That residential investment property could be located anywhere in New Zealand where investors have purchased investment property such as small towns with high rental yields. Recently there has been an increase in investor activity in Masterton, Wanganui, Napier, Gisbourne, Invercargill, etc. If the financially stressed commercial property owner sells their residential property in these areas (even if the residential property is positive cashflow), then this may depress local residential real estate prices due to valuations being based on recent comparable transaction methods. The fault lines in property investor portfolios who are highly leveraged are unknown.

Here's an example:
A restaurant experiences a large drop in revenues, due to loss of tourists, etc
1) Restaurant turns from cashflow positive to cashflow negative due to loss of revenues and high fixed operating costs such as rent. They cut costs, reducing staffing.
2) Meanwhile the restaurant owner also borrows from bank to help fund the operating cashflow shortfall using their house as additional collateral
The revenues still do not recover and the business owner has reached the maximum LVR on their house. The bank is unwilling to lend any more
3) restaurant owner sells the residential property to finance the cash outflows of business
4) restaurant owner runs out of money, then unable to pay rent, and closes down
5) commercial property owner unable to find tenant
6) highly leveraged commercial property owner now has no rent revenue to make mortgage payments on commercial property. Commercial property valuation lowered by the bank, and breaches maximum LVR. Bank requires additional collateral or mortgage reduction.
7) commercial property market is illiquid, so if commercial property owner has a residential property portfolio with low LVR, they may pledges this as collateral to the bank, or borrow against this to reduce commercial property mortgage.
8) if residential portfolio is high LVR, and bank won't lend anymore, commercial property owner sells their residential property to make mortgage payments on commercial property (as residential property is easier to sell than commercial property). That residential property could be located anywhere in New Zealand.

The above example could be the same with an exporter who has main revenue source of sales to China.

The dynamic above increases effective supply of residential real estate to the market for sale. This is despite there being a reported underlying housing shortage in Auckland - in a underlying housing shortage, all underlying demand is assumed to be ACTIVE, but most of that demand is INACTIVE (i.e not actively looking to buy real estate). For example, a family on low income is counted in underlying demand, but they are unable to buy residential real estate as they do not have the deposit amount required, or are able to meet the bank's debt servicing criteria to be eligible for a loan to buy property at current price levels - hence they are INACTIVE in the property market at current price levels, and not in effective demand for residential real estate. If property prices fell substantially, then they might become active in the property market.

Local real estate owned by offshore individuals

Foreign offshore buyers have been large buyers of residential real estate in NZ. If these foreign owners of residential real estate are financially stressed at home, then they may choose to sell their residential real estate in NZ. There are reports of millions of small businesses in China facing financial stress. Now that the coronavirus has spread to Singapore and South Korea, there may be financial stress on businesses / individual there.

Refer -

Note that in 1998 during the Asian Financial Crisis, there were South Koreans who owned real estate in NZ, and they sold their real estate assets in NZ.

There have been similar stories recently of large leveraged businesses in China who have been selling off their offshore assets due to financial stress. Refer HNA Group, Dalian Wanda, Anbang Insurance, companies based in China. -
There are likely to be similar instances of offshore asset purchased by smaller investors either small businesses or individuals.

During the early 1990's, there were similar sales of offshore assets by Japanese companies and individuals. One area that they were heavily invested in was the Gold Coast in Australia.

And this is before even one case hits New Zealand. What happens if coronavirus hits New Zealand?

The economy slows down:

1) people stop going out
F&B sales fall
Retail sales fall
Entertainment and tourism businesses relying on local residents experience revenue falls

The above businesses experience slowdowns in revenue and cut costs.
Business owners may now face negative cashflow from their business
Staff get cut.
Refer above cycle A- D
Refer second order effects on commercial property landlords

2) manufacturing may stop for a period
The above businesses experience slowdowns in revenue and cut costs.
Business owners may now face negative cashflow from their business
Staff get cut.
Refer above cycle A- D
Refer second order effects on commercial property landlords

If there is a case in NZ of coronavirus, fewer potential buyers will go to house inspections, yet alone go to an auction, or even meet with a real estate agent to sign them up to sell their property.

People focus on avoiding crowds and stockpiling essentials.

What happens to highly leveraged property developers who have projects that are :

1) completed and still unsold?
May have difficulty selling at a price that is profitable to the property developer, and the property developer may need to cut their selling prices to raise cash if the bank calls in the loan, and the property developer is unable to refinance

2) currently under construction?
Some projects may be 100% pre-sold or 80% presold
What happens if those buyers are unable to settle at completion? They might sell in the secondary market at depressed prices and that will impact the developers remaining unsold inventory, as well as other owners of units in the complex.
Depending on the property valuation, the bank may call in the loans, and if the property developer is unable to refinance, the developer could get into financial stress.

what happens to highly leveraged construction companies that are reliant upon property developers for payment and cashflows?

If highly leveraged construction companies are cashflow constrained, then they may face financial stress. That in turn puts potential cashflow stress onto sub-contractors such as tradesman, & materials suppliers.

As a result of cashflow stress, some businesses may need to cut staff.
Some of these staff may have large mortgages, and high debt service ratios. Loss of income may mean cashflow stress for families and may require downsizing.

Check out property developers going bankrupt due to lack of sales and the companies have run out of cash -

Secondary property market transactions drop

Flat viewings dwindle, transaction volume slumps as coronavirus infects some residents in Hong Kong housing estates
Flat viewings and transaction volume have dwindled in housing estates affected by coronavirus infection

The coronavirus outbreak is hurting Hong Kong’s residential property market as flat viewings dwindle and transaction volume shrinks in private housing estates where some infected residents were detected by health authorities.

Also financial market prices are falling. Here is another subtle financial linkage to the untrained eye:

1) The NZX price fall (and those in global stock markets) impacts portfolio values.
2) Including values of portfolios invested in Kiwisaver
3) Kiwisaver withdrawals are a source of funds for deposits for first home buyers to purchase owner occupier residential real estate.
4) First home buyers were 19% of the new lending by banks (so potentially 19% of buyers of residential real estate)

Question: What happens if first home buyers now don't have a sufficient deposit to buy a house?

At current house price levels, the pool of potentially active house buyers has just shrunk.

Story of a restaurant owner in Auckland.

Many Auckland Chinese restaurants may be on the brink of collapse as fears over the coronavirus outbreak continue to drive away customers.

Business at Auckland establishments has dropped by up to 60 per cent over recent weeks, and the NZ Chinese Cuisine Association says many may be forced to shut.

Association board member Harry Cai said most of the association's 500 members were "bleeding" and struggling to keep afloat.

Cai, who is the general manager of Guangzhou Hotpot in Newmarket, said his restaurant has had more than 200 cancelled bookings since the coronavirus epidemic started.

Some other job losses we're hearing anecdotally are in export oriented industries who export to China
1) logging drivers
2) meatworks

Haven't heard anything yet about other export industries / businesses to China such as Fonterra, & Zespri.

China is now New Zealand’s largest trading partner, with two-way trade valued at over NZ$28 billion in 2018. China is also New Zealand’s second largest and fastest growing tourism market, largest source of international students, and a significant source of foreign investment.


How many people are reliant upon incomes from these key export industries? what happens if they have lower household incomes (i.e have their hours cut or lose their job?) can they continue to make their mortgage payments with lower incomes? if not, how much long could they continue making their mortgage payments from their savings?

Areas where these employees working in export industries could be vulnerable to housing correction, especially if many have lost their source of income to continue paying mortgages.

1) logging - Kawerau and surrounding areas
2) meatworks - various places in NZ -

Kiwi's bought $11.5b worth of goods from China last year, twice as much as we did in 2008. That's also double the value imported from Australia and the US.
In October 2018 the largest dollar value increase for monthly Chinese imports hit a new record of $1.5b.
Electronics: Kiwi's bought $2.3b worth of electrical goods and machinery from China last year, mainly items like cellphones and computers.
Machinery: China also supplies New Zealand with electrical and mechanical machinery to the tune of $2b. Things like boilers and farming equipment.
Textiles: New Zealand imported about $1.5b in clothing and other materials last year, supplying major Kiwi retailers like the Warehouse or MacPac.
Plastics: New Zealand imported over $500m worth of the stuff.

Some other tourist related businesses that are likely to be affected:

1) hotels, bed and breakfasts, airbnb rentals - how many privately owned b&b and airbnb rental properties have been purchased with high levels of debt? How long can they continue their mortgage payments with a significant drop in revenues? These vacant short term lets may come onto the long term letting market. Especially in tourist reliant locations such as Queenstown, Rotorua.
2) foreign student accommodation
i) - how many apartment owners are reliant upon foreign students for their income? how many have been purchased with high levels of debt? How long can leveraged property owners continue their mortgage payments if the student doesn't come to NZ due to the ban on travellers from coronavirus affected countries? These may come onto the long term letting market for local residents.
ii) student home stays - how reliant are families on this income? Are household budgets reliant upon this income to meet mortgage payments? What will be the impact on household budgets?

Invisible portfolio fault lines

Some people are forced to sell residential real estate (either owner occupied, or investment property) due to cashflow stress in some other area of their personal or family finances. Some examples:
1) businessman who has loss making business, needs cash - e.g restaurant, tourism, etc
2) investor requires cash due to losses in financial investments, or cashflow stress as a result of other investments - e.g margin call on stocks, currency trading, futures trading, short options, contracts for difference, wealth management product (accumulator, Lehman mini-bond), another investment gone wrong (caught up in a ponzi investment scheme), cash required for commercial property investment, etc

Example of a business owner where the business went into bankruptcy and the owner had to sell their investment property portfolio

Tremewan said he had tried to protect staff by putting about $600,000 of his own money and from another company he owned into Welhaus.

He had sold his family home at Redcliffs and his family would be renting from the settlement date in January, he said.

According to Terranet Advance Web and Ahei Ltd, companies owned by Dan Tremewan and his brother Colin, and directed by Dan Tremewan, own seven properties in Christchurch and one in Akaroa.

Tremewan said some of the properties had since been sold and the remainder were being put on the market "to keep financiers happy".

They would be used to pay first and second mortgages and he did not expect there to be any extra money.

Here is China Ambassador to Australia saying it's all good.

Perhaps he’s the one buying heavy on the Shanghai market today – currently up 1.3%

Well, he truly reached for the Kool-Aid – finished up 2.28%.

Clearly he’s right – what on earth are we worrying about?

What if China turns to austerity rather than stimulus?

Perhaps politicians should cease rubbish talk about gov being resp for good or bad economic results. Esp when they adopt a v narrow range for policy and differences between them are minimal. As in everything done 1984-94 is gospel and there is no alternative.. blah blah

The only reason drought hasn't been declared is because farmers are "prepared and coping". meteorologically we are in a severe drought, most of the North Island and 1/2 of the south. Silage is running short , the problem is that is winters back up feed going as well. A hard winter after this , and we will be very challenged , to say the least .
It doesn't help that dairy has expanded to areas too dry for dairy anyway. They banked on surviving one drought , this is the second year with drought. If it wasn't for last years winter been mild , more would be in trouble.

Just another bulls..t from the bwanker.. have a look at their December outlook commentary, just before Covid-19. The local drought & OZ fire news are everywhere, and what do they say back then?

Too many on Interest.Co are too deep thinkers
Yes there will be a bit of carnage from the Coronavirus in regards to China.
Too many Chinese restaurants around anyway!
Property prices will hold due to more people wanting to come to NZ when it settles down