Mark Lister, 17 February 2020

The Reserve Bank of New Zealand (RBNZ) was more upbeat than many had anticipated last week. Some were obviously expecting a more cautious tone in the wake of recent developments in China.

The RBNZ is monitoring the coronavirus situation closely, although its current forecasts assume there will be no substantial outbreak here, and that internationally things will be getting under control by the end of the month.

It has assumed a 0.3 per cent hit to GDP this quarter. That might not sound like much but, in Governor Orr's own words, the Bank has taken about half the growth that was previously expected off the table.

The ultimate impact will be all about the flow on effects. This could mean anything from weaker global tourism or supply chain interruptions, to falling Chinese consumer spending and lower commodity prices.

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The RBNZ singled out reduced exports, a lower exchange rate and weaker business or consumer confidence as some of the most relevant transmission channels for the New Zealand economy.

While it’s impossible for any of us to predict how the situation will play out, over the next week or two we should get some firmer evidence of how it is impacting the global economy, as well as local businesses.

This week monthly Purchasing Managers' Index (PMIs) are released for Australia, Europe, Japan and the United States. These will be one of the first measures of February activity, and they should give us a good read on just how much disruption coronavirus is causing.

Australia’s PMI will be of more interest than usual, because of the strong links between Australia and China.

Trade data for Hong Kong, Taiwan and Thailand will provide more clues later this month, particularly given the reliability of the statistics we sometimes get out of China.

However, the most useful insights will probably come from company management teams themselves.

About a third of the US corporates that have reported earnings in recent weeks have mentioned coronavirus, with those in the industrials, technology and healthcare sectors discussing it most.

Most have said it’s too early (or difficult) to quantify the impact, although the likes of Under Armour and Estee Lauder, as well as chipmaker Nvidia, confirmed they were hurting at the moment.

Alibaba also cited the change in buying patterns from customers in the wake of the virus, with food deliveries up but demand for clothing and electronics down.

Turning to the domestic reporting season which ramps up this week, Auckland Airport and its Sydney counterpart both announce earnings on Thursday, and one would expect some commentary on any reaction they’re seeing.

Next week will be even more interesting, with a2 Milk, Comvita, Scales and Vista Group set to release results. These companies are all selling products into China and will undoubtedly be seeing some impact on customer demand and supply chains.

Then come Air New Zealand, Tourism Holdings and Port of Tauranga, which will all be experiencing the flow on effects from things like lower visitor numbers and port closures.

If things pan out as the RBNZ forecasts suggest, the impact on our economy will be modest and the negative effects temporary.

Global financial markets seem to agree with that prognosis. US shares hit a new record high at the end of last week, not the typical price action when a major downturn is looming.

However, given the extreme difficulty in predicting how long the outbreak lasts, how widely it spreads and the response from consumers, the RBNZ will be open to rethinking its estimates and acting accordingly if needed.

The next ten days or so should give us a bit more colour on just how much there is to worry about.