Examining regional risks from COVID-19

The COVID-19 threat continues to loom over the economy, with a rise in international cases adding weight to the view that the impact will be longer than originally hoped. New Zealand exports continue to be under pressure, and now supply chain issues are becoming more worrying.

The COVID-19 outbreak is still a highly dynamic event, and we are monitoring it daily to best understand the likely impacts. In the interests of keeping clients updated with the developments and our thinking on the impact of the outbreak, this article follows on from our previous note, and provides both an update and additional regional export insights which may be informative for clients.

Death rate rises, cases spread

As of 23 February 2020, there were just under 80,000 cases of COVID-19 globally, and just over 2,600 deaths. Recent days have seen the death rate for COVID-19 start to increase to 3.30%, as international cases come to the fore. In recent days, large and rising outbreaks have been confirmed in Italy, South Korea, and Iran, fuelling concerns that a wider international outbreak is increasingly likely.

The international case spikes in recent days led to a large hit to global stock markets, as investors shook off their nonchalance about COVID-19 when it was mostly confined to China and started to reassess the risks of a pandemic.

Supply chain and inventory risks rise

Since our last update on 13 February, the COVID-19 situation has continued to evolve rapidly. Two emerging issues, which weren’t as serious two weeks ago, have emerged.

Supply chain disruption has emerged as a key barrier to global and domestic activity, with China’s position as a manufacturer of inputs seeing global factories halt work. In New Zealand, there is some risk to local supply chains dependent on Chinese materials, including in electronics and building supplies, as well as capital goods.

Possible inventory issues in New Zealand could see some resources, like retail electronics, more difficult to come by in the short term. Reports have emerged of short supplies of goods at retailers, with inventory already run down over the Christmas period.

Here’s a wrap-up of the impact on export-oriented sectors:

  • Tourism is set to take a sizable hit, with a ban on foreign arrivals from China now extended for the entirety of February. With rising international cases, New Zealand may consider implementing bans on arrivals from other infection hotspots.
  • Aviation is suffering what some in the industry are calling the worst hit since the 9/11 terror attacks. Air New Zealand has issued a downgraded profit guidance of $35-75m due to the COVID-19 outbreak, and have also reduced or ceased flights into China, Hong Kong and South Korea, and have lowered trans-Tasman and domestic flight capacity. Flight reductions have now occurred across a swathe of airlines in Asia, as lower flying volumes are expected.
  • International education is currently missing 6,000 Chinese students who are caught by the travel ban, which is costing the education sectors hundreds of millions. New Zealand institutions are working with the government on an exemption to the travel ban for students.
  • Dairy prices have fallen by 8% over the last two GlobalDairyTrade auctions, with several downwards revisions to milk price expectations by bank economists pointing towards a $280m reduction in the 19/20 pay-out. Although a drought has now been declared in Northland, and other parts of the country remain dry, the difficulty in moving dairy exports through the border is dampening prices.
  • Meats have experienced a similar situation, with exports taking longer to clear Chinese borders and reach market. Meat prices have fallen in the last few weeks, even though China is working to prioritise food imports.
  • Forestry remains in a precarious position. AgriHQ has reported export prices have fallen 16%, and many logging industry employees are without work. The government is investigating the potential to redeploy forestry workers to DoC for track clearance or eradicating wilding pines.

The government has announced it is working on its fiscal reaction to the outbreak, including a plan to stimulate economic activity. There is also a growing expectation that the dual demand and supply shock that the COVID-19 outbreak presents, and the spread of international cases, will spur the Reserve Bank to cut the OCR in either March or May to support economic activity.

Exploring regional export concentrations

With export markets still under significant pressure, we have examined our regional export estimates, published in our Regional Economic Profile, to measure the exposure of regions to certain export products. We have looked particularly at exports that have a greater reliance on China to examine the possible exposure of regional export markets to the ongoing effects of the COVID-19 outbreak.

It’s important to remember that even though an area might not manufacture some export products, they may still be impacted by the outbreak. For example, an area might have little or no dairy or meat processing (and hence, by our estimates, no regional dairy or meat exports), but the price of dairy products or meat are still going to impact that local area.

Our regional trade table, below, looks at the share of estimated regional exports are in a certain export category. More detailed insights at a territorial authority level, if required, are available from Infometrics.

We have updated this data this morning to update our forestry estimates, as due to a processing error raw log exports were excluded.

We’ve examined the following regional export estimates based on the reliance of that export market on China, and the size of our exports to China last year. For reference, these include:

Tourism spending concentration are also important

We have also examined tourism spending to identify regions that get the greatest concentration of Chinese tourist activity and are thus most susceptible to a reduction in Chinese tourism activity. Our third table, below, outlines the regional share of international tourism spending that Chinese tourists contribute.

Again, more detailed insights at a territorial authority level, if required, are available from Infometrics.

Auckland, Canterbury, and Otago are the key Chinese tourism markets at risk, with not only large shares of international spending in those regions coming from Chinese tourists, but these three regions also account for 85% of all Chinese tourist spending in New Zealand.

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