Coronavirus: 'Hit to activity' to last one quarter, possibly two - economist

World globe with NZ currency.
Recession risk is rising, but the end result could just be negative growth. Photo credit: Getty.

Economists remain cautious to call out a prolonged recession in New Zealand, predicting one, possibly two-quarters of negative growth.

Following BNZ's prediction on Monday that a recession was likely and Tuesday's stock market sell-outs due to coronavirus and oil prices, Westpac senior economist Michael Gordon is hesitant to hang his hat on the economy going backwards for more than a single quarter.

"A 'recession' is a sustained downturn, often defined as two quarters in a row of negative GDP growth," Gordon explained.

While 2020 is panning out to be a dismal few months, at some point the economy will bounce back to previous levels.

"What's clear is that there will be a hit to activity over the first half of this year.

"Currently we're forecasting -0.2 percent for the March quarter and +0.3 percent for the June quarter," Gordon added (although a second negative quarter could be within forecasting limits).

Gordon said that in practice, a true recession lasts longer than two quarters: for example, the 2008-to-2009 Global Financial Crisis stretched over six quarters.

"There were two negative quarters in the second half of 2010, but no one remembers that as a recession," Gordon added.

Although there's no doubt that markets are in 'shock', pointing to a short and sharp downturn, as soon as coronavirus is contained, an equally short and sharp period of growth is likely.

"The impact on the economy stems from the measures that are being taken to contain the virus's spread (lockdowns, travel bans, self-isolation, etc.).

"These won't be permanent: at some point, economic activity will return to previous trends," Gordon said.

Sharon Zollner, chief economist at ANZ, said that although the risk of recession is rising, there are some positive threads to all the negative news.

"The odds of recession are rising rapidly in every country of the world: we've never seen anything like it," Zollner said.

On the plus-side, the local economy is well-resourced.  

"We have fiscal headroom [and] a freely floating currency that tends to tank in times of trouble, delivering an easing in monetary conditions.

"[Thirdly], we sell food - and people have to eat," Zollner said.

In support of Zollner's comments, Gordon said that New Zealand has a well-functioning government, there's room for fiscal and monetary policy to respond to shocks, with the floating exchange rate acting as a "buffer". 

"That may sound like fairly basic stuff, but a lot of countries don't fare nearly as well on these metrics," Gordon said.

Among the variables that are on 'watch and wait' are New Zealand's exposure to China as the world's second-largest economy - and household and dairy-related debt.

"Though it has crept up rather than soared, household debt is just higher than [in] 2007, Zollner said.

"Dairy debt and chance of a marked land price fall [are also] big threats," Zollner added.

Gordon said that New Zealand's high trade exposure to China is both a strength and a weakness, noting that as the virus continues to spread, this is becoming a moot point. 

"China is a rapidly growing market and New Zealand is good at producing what China needs - but that leaves exporters with limited alternatives if there are any disruptions," Gordon said.

Before coronavirus hit, the local economy was poised for growth.

"This year, we were expecting the New Zealand economy to accelerate, with support from low-interest rates, rising house prices and increased government spending," Gordon added.

As coronavirus continues to impact local and global markets, economic forecasts are moving along with it. Until the spread of the virus is contained, whether the end result is a single quarter of negative growth or two or more quarters of 'recession', no one can be 100 percent sure.

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