COVID-19 and the Canterbury economy

ChristchurchNZ economist David Dyason explains.

COVID-19 continues to rock the global economy and a significant supply and demand shock persists. World financial markets are tumbling, consumer and investor confidence is down, and the UN Trade and Development Agency anticipates a cost to the global economy of around USD$1 trillion.

Governments around the world have begun to roll out economic stimulus packages. On Tuesday, Jacinda Ardern’s Government tagged an initial $12.1 billion to direct support for businesses, income support and boosting consumer spending, and a $500m healthcare injection.

So how will the Canterbury economy fare through this crisis? Given the plethora of information, it is important to seek truth and measure reaction.

We want this to serve as a state of play, outlining where the economy is at right now, and what to expect.

 

Our industries

In 2019, Canterbury’s economy was worth $31.5b. We earned the most through manufacturing ($3.7b), construction ($3.1b), and professional, scientific and technical services (2.6m).

The industries most exposed to risk from the current COVID-19 situation are food and accommodation services, worth $700m to Canterbury’s 2019 GDP, transport and warehousing ($1.7b) and agriculture, forestry and seafood ($3.5b). These areas make up about 6.5 per cent of the economy.

Event and sport activities, also called arts and recreation services, are also very exposed to risk, and there are significant cancellations and postponements in this sector. Estimates put contribution to GDP at $362m and around 5,500 jobs exist in this sector.

Industries linked to tourism contributed about $4b to the regional economy for the 12 months to January 2020, estimated on nominal spending values. These industries included retail ($1.7b), accommodation ($450m), transport ($480m) and hospitality ($620).

 

Our exports

Our exports (excluding international tourism) are worth $10.2b to the Canterbury economy and represent 15.7 per cent of all New Zealand exports.

A large proportion of our local exports are dairy, mainly milk powder, valued at $3.1b.

Other exports include machinery, meat, cereal and flour products, seafood, timber and wool.D

Dairy exports traditionally carry a low risk and they have performed well in recent months. This low risk status can be attributed to a long shelf life and it being exported by sea – far less disrupted than air. Currently our dairy exports can support supply to the global market.

In the second half of February, dairy exports to China from New Zealand were up 136 per cent compared to the same time last year.

In comparison, national forestry exports during the same period were down 12 per cent, meat was down 53 per cent and seafood was down 68 per cent.

It’s too early to attribute these declines to anything specific, but we can speculate about bottlenecks at Chinese ports, and a significant change in consumer demand.

Compared with other export products, dairy does seem to be more resilient to economic shocks. However, the impact of this shock will eventually flow through all industries, including dairy.

 

Our visitor economy

In 2019, domestic visitor spending was $2.3b and international visitor spending was $1.6b.

Domestic visitor spending makes up 5.5 per cent of Canterbury’s GDP, while international visitor spending makes up 3.8 per cent, the latter being exceptionally seasonal.

Traditionally from March to December, domestic visitor spending more than doubles international. Through the high season of January and February however, international visitor spending outpaces domestic.

Considering domestic visitor spending is larger than international, Canterbury is in a better position to mitigate a shock to international spending, particularly compared to places more reliant on this income stream.

 

So what’s the bottom line?

The Canterbury economy is relatively diversified, with 12 of 18 industries generating more than $1.5b to GDP. This increases our resilience during times of volatility – like now.

The initial closure of Chinese ports and slowing manufacturing did create a supply shock, however we are now also dealing with a demand shock due to travel restrictions and border closures.

Regardless of local market resilience, the shock of the COVID-19 situation cannot be understated.

A recession is highly likely.

Within this rapidly changing environment, we have seen areas of potential growth.  Increased consumer activity in online shopping has led to higher demand for logistics solutions and streamlined delivery, and potential employment growth in this sector.

Working from home has boosted demand for cloud storage and off-site collaboration software which opens up considerable benefit and growth for the tech industry.

We advise that we all continue to act as normal consumers, while following public health guidelines, a sentiment echoed by Central Government.

It’s as important as ever to support local businesses, particularly in the hospitality industry, who will be most affected by our current situation.

We are in this together, and together we can make it through.