Sharon Zollner, chief economist at NZ's biggest bank, says as the economic impact of coronavirus rises so to do the odds of RBNZ OCR cuts

Sharon Zollner, chief economist at NZ's biggest bank, says as the economic impact of coronavirus rises so to do the odds of RBNZ OCR cuts

ANZ chief economist Sharon Zollner says with the COVID-19 (coronavirus) outbreak spreading globally, the odds of Reserve Bank (RBNZ) Official Cash Rate (OCR) cuts are rising.

Over the past week Zollner points out the virus has morphed from a shock to our largest trading partner being China, to a global, synchronised event.

"Infections are rising in Japan, South Korea and Italy, and popping up in more and more countries. A global recession is looking more likely by the day. Equities are having a meltdown," she says.

"It is widely accepted as inevitable that New Zealand will also experience cases, which could have negative implications for sentiment and discretionary economic activity even if the virus is repeatedly promptly stamped out. And even if we somehow dodged the virus arriving on our shores, it’s clear that global industrial production at least is going to be under huge pressure, as a result of supply chain disruption."

"That’s the pointy end of global GDP [Gross Domestic Product] but it will feed through into employment and broader activity if sustained. New Zealand’s commodity prices do cycle with global demand, even putting aside the near-term question of whether we can even get our goods to market," Zollner says. 

"This is a very complex shock, more like a war than a traditional economic slowdown, in that it includes massive disruption to the supply side of the economy, as well as to demand. 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."

She points out that during such an economic shock, the New Zealand dollar generally acts as a buffer to support the economy. Additionally the Government's fiscal policy is well placed to respond in a targeted fashion to support businesses.

"New Zealand is fortunate to have plenty of firepower on that front. What about monetary policy? It’s true that lower interest rates aren’t going to encourage much borrowing and activity if confidence is low and everyone is hunkering down. But monetary policy can still help, and it is becoming increasingly likely it will be needed," Zollner says.

The OCR is currently at a record low of 1% where it has been since August last year. It was last reviewed on February 12. On February 12 RBNZ Governor Adrian Orr noted the emerging risk of the Coronavirus, but said the central bank was expecting the economic impact to be short term. However, it had time to adjust monetary policy if the impact proved to be "larger and more persistent" than expected then.

The next scheduled OCR review is on March 25.

"OCR cuts would put downward pressure on the exchange rate, reduce financing costs for under-pressure businesses and households, and aid confidence at the margin. And it’ll help the economy bounce out the other side of this. Fiscal policy needs friends too. Given how rapidly the virus is spreading, it’s entirely possible we could be looking at OCR cuts in short order, potentially kicking off as soon as March. But at this stage, we’d say May is more likely," says Zollner.

"The market is currently pricing a full cut by August, with a chance of more. We’re not quite over the line to call cuts yet. With uncertainty high, the RBNZ – and we – have a bit of time to see how things pan out. But frankly, probably not much," says Zollner.

Zollner says ANZ NZ currently has no OCR cuts or hikes pencilled in, but sees "strong risks that the next move is down - and pretty soon." In January ANZ NZ's economists said they expected the OCR to remain on hold at 1% for the foreseeable future.

Meanwhile Westpac NZ chief economist Dominick Stephens says drought and coronavirus will deal the NZ economy "a sharp blow" over the first half of 2020. Stephens says the possibility of an OCR cut in March should not be dismissed, although for now Westpac NZ is sticking to its forecast of an August cut.

"Both situations have got more severe recently. In response, today we are issuing an update to our forecasts. We are now forecasting zero economic growth in the March quarter of 2020, and 2.2% over the whole of 2020. If there were no drought and no Coronavirus, we would have forecast 0.8% for the March quarter and 2.7% annual growth in 2020," says Stephens.

"However, based on the assumptions outlined below, we expect economic activity will quickly rebound from the drought- and Coronavirus-affected level. This means we can expect quite rapid rates of quarterly economic growth over the second half of 2020."

Zollner's full note is here. And Stephens's is here.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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70 Comments

China's extrodinary efforts led by CCP and corperated by all Chinese people to contain the virus has shown clear outcomes inside China where new infections dropped day by day.

On the contrary, in countries lack of strong and effective political leadership, the virus spread like unleashed horses.

CCP style leadership is proven to be the most needed in the current situation.

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You seem ready to pounce on so many articles. Are you employed by the CCP to do this?

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This is why I report his comments. This is clearly a CCP propaganda machine. Just look at how he manages to get a reaction out of everyone. Sometimes he posts facts to establish credibility, then he posts some utter BS about how we all need Winnie the pooh in our lives.
Clearly propaganda, most likely paid by CCP, yet we tolerate it...

He's the Chinese version of Convolvulus. (Asterix and the Roman Agent).

Or he's just trolling...

If you don't feed him he will go away eventually.

I hope the editors check it out. It's suspicious for sure.
If it really is CCP sponsored there's no way that should be tolerated

Its 100% satire.... if you can read it like that its actually quite funny.

I also read TTPs in the same way a lot of the time.

Good point, xingmowang highlights the failures of the CCP by excessively praising the CCP each time.

yeah, it is quite funny....

That's insane. CCP or not, there is no way to know, and it doesn't matter. It's just an opinion, disagree or don't, but that's up to the individual. You are in effect promoting further control of speech; very CCP of you!

Totally disagree. If it's government propaganda, that's out of line.
And there are ways of knowing, or at least digging....

X is just an overseas troll living life of ease and retirement away from the rigors of life and learning To fish for bait by trailing a baited line from behind a slowly moving boat made in China. Gotta get paid somehow and in his dotage, needs a yaun now and again, before he falls asleep, before the next session of baiting all you other trolls on Housing...and other uplifting......subjects.
Keep buying it....Nah...didn't think so?.

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Come on Xing.... Throwing people in a big room and not testing them isn't exactally reporting the true stats.
Yes a great job but we all know that the numbers are much higher than reported.

CCP style leadership is what ensured the first doctors reporting a new and concerning SARS-like illness in Wuhan in early December were shut up by the police as spreading rumours and fear mongering.

Oh, you finally admitted NZ houses need to be on a leash.

If the incubation period is 14 days, this suggests the lock down in China won't be for much longer. They'll be keen to trade as per normal, soon enough to avoid a recession.

Just another vested interest article to increase their profit margins.

If there's an environmental reservoir, or one infected person slips through then they can quarantine 10 million people or whatever for another month or two. It's quite convenient and easy. I'm sure the economic impact will be minimal

But at what cost to the people......

The CCP isn't showing leadership - the Chinese people are showing fear and the CCP is reacting to that fear the only way it knows how.

If I repute your comment Xing. Would I get the special treatment at the airport if I do a stopover in Shanghai or Beijing?

Xingmowang

Do you live in nz? Only asking because are you a loyal kiwi? Or is nz just an economic hostel? Its fine to be pro china if you are chinese. Just like you should support anglo celtic pakeha nz to be loyal to the uk no matter how many generations removed. Just a thought...

@ponzikiwi have you ever heard of Ali G the 'MUSLIM " Satirist ....... well he is actually a British Jewish fellow with the surname Cohen , and holds a Masters degree in English from Oxford .

Read Zing's comments twice , and you will realize he is taking the Mick

Surely such great and wondrous leadership would have stopped it from spreading outside of Wuhan.

CCP style leadership is proven to be the least needed in the current situation.

Hahahahaha

Agreed, out of 195 Nations on the planet - only China is the strong one, effective political leadership..the rest of those countries.. are weak.
They all have been weaken in the past 200-300 years by (fill the blank) - CCP style leadership is needed in the current situation.. out of how many situations?, forgot all of them - ya da ya da - If China is the only country by your CCP childhood indoctrination, what do they do with those other countries: Japan, South Korea, Iran, Italy, Croatia etc. - ouh forgot again. China is for Chinese.. and it's never about for the world. World will soon learn the truth about China, use money to the ruling elite, propaganda, consume any natural resources, get/procure the land.. then move people - Every one has been warned about this year of RATzo - Even most Chinese already prepare what is all about. China is the only nation on the planet, first to suggest.. to mine the moon? for sure after able to claim area for colony first.. what next? BUT for sure I agree too with Xing.. the current strong Chinese, leadership.. was able to 'contain' the spread - The world must follow this step to 'contain' means? in China? no peoples movement in/out of the city - NZ can do better, we're self sufficient - Xing won't mind if we do the same 'strong' steps - ban those people movement in/out of the country specially from the country where epidemic occur? Follow China? means, stronger, follow it's action... right?

And given your argument, maybe we can say it is a country run by the CCP that allowed the emergence of a virus such as Covid19 in the first place.

Can only assume this is sarcasm... CCP is disgusting and the west needs to stop all trade with this country ASAP.

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Well duh.
I wonder if Liam Dann is sticking by his statement from a week ago that a recession is 'highly unlikely'.
What geniuses our economists and financial journalists are...

Keep going....

New territory so its hard to fathom the outcome now

Yes but...most economists were being stupidly optimistic even one week ago...

Bank spruikers!?

Yes. And Liam Dann, who is NZME's resident business spruiker, one of the great advocates of the theory that almost nothing can derail NZ's rockstar economy...

NZME are the media arm of the real estate industry.

Scum.

Mortgage Mongers cum Doom and Gloom Merchants.

I read that that they still think they have a chance that it's not going to get that bad. Still on the possitive side drumming up bussieness, in my view.

Yeah and bloody disgraceful behaviour. The vested interest of bank economists should disqualify them as go to commentators by media. Portray themselves as all knowing but in reality snake oil salesmen to the uninformed.

It would be a really good job because you aren't expected to be right.

Cause and effect, shock and awe. Also utter garbage. Would you be scared of corona if you didn't have every media outlet screaming in hysteria that you have to be scared of corona? I think its a massive overkill and simply an excuse for our increasingly authoritarian global administrations to flex their control over resident populations...

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So ignore the media's interpretation of the events and drill into the actual data yourself. Comparing the raw rate of infection, and reported fatality rates, to similar previous events this does appear likely to turn into a serious Pandemic.

This isn't a catastrophe on the scale of the Spanish flu. The real worry is the global economy has been left in a precarious state by repeatedly trying to solve a debt crises by creating even more debt, it won't take an earth shattering event to topple the whole house of cards.

The data I have seen to date identifies that it is killing mainly very young or the elderly or those with preexisting complications. Influenza is far more lethal by comparison.

I haven't seen any data showing it is killing the "very young", quite the opposite.

Remind me of that Chloe/green comment; Ok boomer - time is up, even reverse mortgage can't do much - that cruise ships travel probably rife with cancellation - this bug have a targeting scope. - China already specifically warn this planet what sort of year this will be... Ratzo! year of pest.

Wait until you seen this bug corona attacking the specific human protein, once you see how RNA evolve, as compare to that lame DNA virus. Then your brain will light up with excitement - this is microscopic molecular marvel. This one can lie dormant before striking again in cold climate, very adaptable crown (some use the term mutation/mutated) - I just find them 'adaptable/flexible' to attach to variant of human protein.

That precisely being tested by CCP in China - how effective 'our control' on this.. F**** the rest of the world.

Not too sure further OCR cuts would do much at this stage, it might even cause less business confidence. Government needs to think about other potential ways...

'Think' being the word.... chance of that and acting?

Have any previous OCR cuts actually achieved anything either?

I wonder if the reserve bank will recommend the govt pass legislation reducing the use of cash? I read today it looks like the Australian parliament has the numbers to pass through the 10k cash ban.

Adrian Orr said we will protect the use of cash? Yep sure but with a say um 2,000 limit. Should be enough for teens and retirees considering he wants to "protect" cash. If rates drop to zero or lower cash will have to be limited.

Coronavirus is the perfect excuse to ban cash. No cash = negative interest rates. Its just what the IMF and banking cartel have been praying for.

There goes the budget surplus. Welcome Helicopter Money. More QE. More asset inflation. Welcome to 2008.

All those including universal basic income! Helicopter Money won't work as people will use it to pay off debt. I suggest giving everyone a visa prezzy card loaded with 5k. Can only be used to buy goods and services. Heaven forbid we might actually get some inflation!

Better idea let's up first home owners grant to 100k and have negative interest rate 60 year mortgages to really get the economy moving.

Loaded Prezzie card is good enough for me, thanks.

Do you think the RBNZ is going to loosen the LVR speedlimits? Because as the other story today showed, we are heading towards the buffers already, with "Of all lending to investors, 15% went to borrowers with deposits of less than 30%.", but RBNZ speedlimit for investors is 5%. so new lending is running at 3x the speedlimit. Won't be long before they bump into that limit.

I feel like OCR cuts would have been a significant contributor to a recession if it happens.

Wuflu is just a trigger, the real issue is that OCR has created so much virtual money and encouraged its investment in risky areas that it was bound to go bad eventually.

We made this bed, can we just sleep in it instead of endlessly rearranging the pillows.

Supply chain disruption.....?
So when is the price inflation coming?
Prices of imported goods will rise.

You got it. And any stimulus will turbo charge inflation as the cash chases fewer products. Perfect storm as interest needs to rise to reduce the coming tsunami of inflation. Completely exposed with no dry powder.

No shutting the barn door now, the horse has already bolted.

ANZ chief economist Sharon Zollner says with the COVID-19 (coronavirus) outbreak spreading globally, the odds of Reserve Bank (RBNZ) Official Cash Rate (OCR) cuts are rising.

What ever for?
Recessions were evident in Japan and Germany before the virus scare and their official interest rates regimes had veered into negative territory.

Show evidence that cutting the OCR in half three times from 8% to 1 % has done anything to promote outsize GDP growth beyond over capitalilising low regulatory capital RWA assets, funded by excessive bank lending to the top end of town.

Why? Because big clever economic book says so

Yes, it's a matter of who controls the narrative not the outcomes.

Car Dealers / Boat Dealers / Hotels / Restaurants are about to take a BIG hair cut.

Wouldn't mind a deal on a boat tbh

C'mon guys , can you not see that Xingmowang is a satirist , he is like our very own Ali G .

He takes the piss , to put it in Kiwi parlance , and the commentariat all too often react with outraged indignation at his comments

It's a good thing that big smarty pants Adrian Orr didn't already irresponsibly piss away OCR cuts trying to stoke more housing boom times for his boomer mates.

The real estate bubble might be about to meet it's pin.

The virus is likely to be inflationary as production is impaired.

Instead of 50 basis point? he & the team will be responsible to maintain our GDP trajectory through means of import productivities (in this case importing more migrants with capital to beef up property economy, the only way to attract those? is via reducing OCR by 100 basis point. This will signal to the Chinese one world - we really means business, we need your system to overrun NZ broken systems. Bublee.. what bulb?

The cost of money is not stopping anyone spending so why cut the OCR.
The lack of returns on term deposits is stopping spending by a substantial number of people.

If Piggy-in-the-Middle classes is not raiding their Piggy...Bank it is because the Bank made a pig of themselves lending the Savers Fortunes. way into the biggest debt manipulation, known to Man. That Man has nowt to say about it..speaks volumes.

That Banks and the in-debted want more Interest Rate cuts, speaks volumes........quite Loud and Clear.

Penny pinchers.....beware....they squandered it.

Increasing OCR means, pain medication to be administered - no one liked that, so what other method? ouh, ignore it, pretend it's not there, just meditating in the hope for betterment or supply something that you think might work in getting towards theoretical ideal again/lowering it. Hmn, how about when it's still not working, do we have room to wiggle or not? - I likened NZ economy as this patient x: got a Cancer, but don't think have it, couple anomaly, ok agreed to check, damn it's stadium 4, let's pretend it's misdiagnosed, damn doesn't work, it keep annoying,.. let's just wait into the hospice for the painful death version.. or? how about prolong it to remission level - damn, have to do Radio/Chemotherapy.. very unpleasant.. but have to do it anyway.. just to delay it further.. buying couple more months, weeks, days, hours.. then the standard final whistle. Ouh that land/house/RE richness.. ownership etc. - Almost all the patients stating the same, if only they could exchange those wealth with health.. they'll do so in a blink of an eye - wonder why.

Flights of Fancy...Fancy a cheap flight......book now....go on..I dare you.....almost free....but there may be a cost??

https://www.marketwatch.com/story/there-are-4-flights-in-china-but-dont-...

I suggest that you all just ignore Xing. He will eventually fade away.

If, as looks increasingly likely, this virus becomes a full-blown pandemic, then cross-party support for the appropriate response would surely benefit the country, but in election year, what are the chances? Zero?