Weekly Economic Commentary - The Government, the virus and the QE program.
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Kahurangi National Park, New Zealand
Weekly Economic
Commentary.
The Government, the virus and the QE program.
After a tumultuous few weeks, financial markets have calmed again. In part, that’s due to
signs that the daily number of new Covid-19 infections globally is flattening off. However, the
major factor that has soothed frazzled nerves in financial markets has been the extraordinary
level of fiscal and monetary stimulus that has been announced globally in recent weeks. Those
measures have supported a rally in equity markets, though major indices are still well down on
their pre-outbreak highs and they remain choppy.
Financial markets sentiment remains fragile and will be sector. Both the wage scheme and the business loan scheme
repeatedly tested over the months ahead as the extent of the appear to be working smoothly, with massive take up of both.
downturn in economic conditions becomes clearer and weak The major banks are also providing mortgage repayment
economic data emerges. The strain on businesses’ financial deferrals of up to six months for households, which we expect
position is already evident, with growing reports of layoffs and will also be heavily subscribed.
some business closures already occurring. We expect to see
more of this in the coming weeks. These schemes make sense. They will allow businesses
and households to tide themselves over through a period
The centre pieces of the Government’s effort to backstop the of extreme disruption, but will not unduly stress the
economy are its wage subsidy scheme and its Business Finance Government’s balance sheet. The thing to remember,
Guarantee Scheme. Under the guarantee scheme, banks will though, is that once Covid-19 has passed businesses will find
provide loans to businesses but the Government will take 80% themselves carrying more debt, and will be more focussed
of the credit risk and the Reserve Bank will provide the funding, on balance sheet repair than expansion. For example, if the
if needed, under a newly announced Term Loan Scheme. This is business loan scheme is fully taken up it would amount to
almost as though the Crown is lending directly to the business about 5% of all current business lending (ex agriculture).
01 6 April 2020 Weekly CommentaryIn addition to measures to cushion the economy through the economy now in train, we do expect that inflation will drop to
Covid-19 disruption, the Government is also looking at policies low levels over the coming year.
that will support a recovery in activity and employment
when the virus has passed. Details of this spending are still However, it is conceivable that upward pressure on inflation
being determined. Thus far the Government has signalled its could emerge over time, for example if permanent disruptions
intention to significantly ramp up spending on infrastructure to global supply chains caused higher production costs.
and building. That comes a top of the $12bn expansion of the This could eventually force the Reserve Bank to curtail its QE
Government’s building program which was announced late program and allow interest rates to rise. In turn, that would
last year. hamper the recovery and would make it more difficult for
the Government to continue borrowing. We view this as a
This sort of state-led building program could help to address risk scenario only, but it does illustrate why inflation will be
some of the coming increase in unemployment, and it also important to watch.
fits with the Government’s aims of refreshing the nation’s
infrastructure stock. However, we do have some doubts about
Operating balance as a % of GDP
how fast such spending can realistically be rolled out. The
Government is prioritising projects that will be ‘shovel ready’ % of GDP % of GDP
8 8
within six months and has highlighted that the expected rise in Actual Forecasts
6 6
unemployment will ease capacity constraints. But as we have HYEFU projections
4 4
often seen, infrastructure spending can take an extended Westpac estimate
2 2
period to get underway. We suspect that this spending
will be introduced in conjunction with other measures to 0 0
bolster demand and support the labour market after the -2 -2
lockdown period. -4 -4
-6 -6
The Government’s support packages will be expensive. -8 Source: The Treasury, Westpac
-8
Automatic fiscal stabilisers will further add to the pressure -10 -10
2001 2004 2007 2010 2013 2016 2019 2022
on the Government’s books, as tax revenue drops and
June years
expenditure in areas like health and social welfare increases.
We have calculated that the combination of automatic
stabilisers and the support measures already announced Net core Crown debt as a % of GDP
will require the Government to increase its borrowing by
$65bn over the coming four years. And with further measures % of GDP % of GDP
60 60
likely to be introduced over the coming months, that figure Forecasts
Actual
will likely rise to around $70bn. That would result in the 50 50
government debt to GDP ratio rising from 18.5% now to 40% HYEFU projections
40 40
by mid-2022. That is high by New Zealand standards, but Westpac estimate
still low by international standards and quite manageable at 30 30
today’s low interest rates.
20 20
In order to fund this debt, the Government has announced 10 10
that it is issuing $17bn of bonds over the coming three months, Source: The Treasury, Westpac
and we estimate that total issuance between now and June 0 0
1992 1996 2000 2004 2008 2012 2016 2020 2024
2021 will have to be $48bn. June years
That is an awful lot of bonds for the market to swallow, but
fortunately there is a ready buyer. The RBNZ has committed
to buying $30bn worth of Government bonds over the
coming year under its Large Scale Asset Purchase Program
(i.e. Quantitative easing). The purpose of this program is to
prevent an unwanted increase in interest rates. We believe
that the RBNZ is aiming to keep longer-term Government
bond rates at roughly 1%. In order to achieve that the RBNZ is
probably going to have to increase its program beyond $30bn,
as well as stepping up the weekly pace of purchases (currently
running at $1.35bn).
This raises the question of how long the RBNZ can continue
to print cash to support increases in Crown spending? The
key consideration on this front is the RBNZ’s inflation target.
Provided inflation remains low, the RBNZ can continue with
asset purchases. And with a significant downturn in the
02 6 April 2020 Weekly CommentaryThe week ahead.
NZ Q1 Survey of Business Opinion QSBO domestic trading activity and GDP
Apr 7, General business situation, Last: -26 % %
Domestic trading activity (past 3 months), Last: -11 50 3
40
– This quarter’s survey includes responses up to 20 March. While that 2
predates the country’s shift to Level 4 COVID-19 restrictions, it still 30
captures much of the recent disruptions to economic activity and related 20
1
changes in business sentiment. 10
– Consistent with other recent surveys, we expect the March quarter survey 0 0
will show a sharp drop in business confidence. We also expect a drop in -10
the backwards looking trading activity questions, which tend to be a good Domestic trading activity, -1
-20
next 3 months (lhs)
gauge of quarterly GDP growth. Weakness is expected to be widespread, -30
but especially pronounced in the manufacturing sector. Quarterly GDP growth -2
-40 Sources: NZIER, Stats NZ (rhs)
– We will also be watching the hiring and investment gauges, which -50 -3
are expected to record sizeable drops in the face of a deteriorating 1999 2002 2005 2008 2011 2014 2017 2020
economic outlook.
NZ Apr ANZ business confidence NZ business confidence
8 Apr, Last: -63.5 net % %
100 5.0
– Business confidence has plummeted in the face of the Covid-19 outbreak Business confidence (left axis)
and the related disruptions to economic activity. The number of 80 4.5
businesses expecting weaker trading conditions over the coming year Inflation expectations (right axis) 4.0
60
has dropped to a multi-decade low. Against this backdrop there has 3.5
40
been a sharp drop in the number of businesses planning to take on new 3.0
staff or undertake capital expenditure over the coming year. The fall in 20
2.5
confidence has been broad based. 0
2.0
– A preliminary result for the April survey will be released this week. This -20
1.5
survey will cover the first week of the lock down. The activity gauges -40 1.0
will certainly be weak. We’ll be watching to see how plans for hiring
-60 0.5
and investment are being affected in the face of both the lockdown and Source: ANZ
Government support packages. -80 0.0
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
Aus Feb trade balance, AUDbn Aus trade balance
Apr 7, Last: 5.2, WBC f/c: 3.5 AUDbn AUDbn
Mkt f/c: 3.8, Range: 0.7 to 4.5 46
8
– Our forecast is for the trade surplus to narrow to $3.5bn in February, led 42 Trade balance (rhs) 7
Exports (lhs) 6
lower by exports. However, there is extreme uncertainty around this 38
Imports (lhs) 5
forecast. Both exports and imports could move in a very large range. 4
34
3
– On February 2, Australia closed its borders to flights from China for non-
30 2
residents. China was in lock-down in February, triggering a collapse in 1
output. Australia sources 25% of goods imports from China - so this is a 26 0
significant disruption. -1
22 -2
– Domestically, exports were also dented by weather disruptions to iron ore -3
shipments. 18
Sources: ABS, Westpac Economics -4
14 -5
Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Jan-20
03 6 April 2020 Weekly CommentaryThe week ahead.
Aus Apr RBA policy decision RBA cash rate and 3 year bonds
Apr 7, Last: 0.25%, WBC f/c: 0.25% % %
Mkt f/c: 0.25%, Range: 0.25% to 0.25% 8
monthly
8
– The RBA cut the cash rate by 25bps at its March meeting and by another 7 7
RBA cash rate 3 year bonds
25bps to 0.25% at an emergency inter-meeting move on March 19 that 6 6
also included the deployment of a range of QE measures including
policies aimed at lowering key market rates (3yr bonds) and providing 5 5
low cost term funding for banks. The RBA has also moved to provide large 4 4
liquidity injections to stabilise increasingly dislocated financial markets.
3 3
– With the RBA continuing to rule out negative rates, the cash rate is set to
remain at its current level for a very long time. As such, the focus of RBA 2 2
meetings will be on how the Board assesses its QE measures and whether 1 1
they may require adjusting. For April we do not anticipate this requiring Sources: RBA, Bloomberg, Westpac Economics
any adjustments. 0 0
Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16 Mar-18 Mar-20
Aus Feb housing finance approvals Aus housing finance by segment
Apr 8, Last: 4.6%, WBC f/c: 1.5%
$bn value of housing finance $bn
– Australia's housing market had started the year with good momentum 14 14
'upgraders'
ahead of the coronavirus shock, with prices posting solid gains in the first Source: ABS, Westpac Economics
since May
12 investor 12
few months and turnover holding on to the strong gains in late last year, foreign buyers*
*based on annual FIRB
+29%
approvals, financial
Q1 sales up 28% on the same time last year. In terms of housing finance 10 FHBs years (latest is 2017-18) 10
approvals, Jan showed a robust broad-based gain, the total value of
approvals surging 4.6%mth with gains in both volumes and average loan 8 8
size, and across all segments, albeit with investor activity continuing +22%
6 6
to lag.
+34%
4 4
– We expect Feb to show a similar pattern with a more moderate pace, the
total value of approvals rising a further 1.5%. This is ahead of what will be 2 2
a steep drop through March and April as the sector moves into a virus-
related shutdown. The outright ban on physical auctions and open homes 0 0
that came into effect in late March coupled with wider social distancing Jan-00 Jan-04 Jan-08 Jan-12 Jan-16 Jan-20
requirements and health concerns and a deep shock to economic activity
mean property market activity will be reduced to a trickle of online and
private sales.
04 6 April 2020 Weekly CommentaryNew Zealand forecasts.
Economic forecasts Quarterly Annual
2019 2020
% change Dec (a) Mar Jun Sep 2018 2019 2020f 2021f
GDP (Production) 0.5 -1.0 -14.0 9.9 3.2 2.3 -5.6 6.7
Employment 0.0 -0.9 -6.8 3.6 1.9 1.0 -2.4 3.6
Unemployment Rate % s.a. 4.0 4.7 9.0 8.0 4.3 4.0 7.0 5.6
CPI 0.5 0.5 0.4 0.9 1.9 1.9 2.3 1.0
Current Account Balance % of GDP -3.0 -3.0 -3.5 -3.7 -3.8 -3.0 -4.1 -3.3
Financial forecasts Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21
Cash 0.25 0.25 0.25 0.25 0.25 0.25
90 Day bill 0.40 0.40 0.40 0.40 0.40 0.40
2 Year Swap 0.60 0.60 0.60 0.65 0.70 0.80
5 Year Swap 0.70 0.75 0.80 0.90 1.00 1.10
10 Year Bond 1.00 1.00 1.00 1.05 1.10 1.20
NZD/USD 0.60 0.62 0.64 0.65 0.65 0.66
NZD/AUD 0.97 0.97 0.96 0.96 0.96 0.95
NZD/JPY 64.2 65.1 67.8 69.6 69.6 70.7
NZD/EUR 0.56 0.58 0.60 0.61 0.61 0.61
NZD/GBP 0.49 0.50 0.52 0.52 0.52 0.52
TWI 67.8 69.3 70.7 71.4 71.2 71.2
2 year swap and 90 day bank bills NZD/USD and NZD/AUD
2.00 2.00 0.70 1.00
1.80 90 day bank bill (left axis) 1.80
0.68 0.98
1.60 2 year swap (right axis) 1.60
0.66
0.96
1.40 1.40
0.64
1.20 1.20 0.94
0.62
1.00 1.00
0.92
0.60
0.80 0.80 NZD/USD (left axis)
0.58 0.90
0.60 0.60 NZD/AUD (right axis)
0.40 0.40 0.56 0.88
Apr-19 Jun-19 Aug-19 Oct-19 Dec-19 Feb-20 Apr-20 Apr 19 Jun 19 Aug 19 Oct 19 Dec 19 Feb 20 Apr 20
NZ interest rates as at market open on 6 April 2020 NZ foreign currency mid-rates as at 6 April 2020
Interest rates Current Two weeks ago One month ago Exchange rates Current Two weeks ago One month ago
Cash 0.25% 0.25% 1.00% NZD/USD 0.5870 0.5691 0.6334
30 Days 0.35% 0.43% 1.00% NZD/EUR 0.5428 0.5341 0.5582
60 Days 0.42% 0.55% 0.91% NZD/GBP 0.4796 0.4894 0.4853
90 Days 0.48% 0.67% 0.83% NZD/JPY 63.62 63.13 66.09
2 Year Swap 0.49% 0.68% 0.71% NZD/AUD 0.9761 0.9826 0.9579
5 Year Swap 0.60% 0.92% 0.77% TWI 67.85 66.91 70.35
05 6 April 2020 Weekly CommentaryData calendar.
Market Westpac
Last Risk/Comment
median forecast
Mon 06
NZ Mar ANZ commodity prices –2.1% – –5.0% Sharp declines across all major commodity exports.
Aus Mar MI inflation gauge 1.6% – – A secondary consideration, but below target.
Mar ANZ job ads 0.7% – – Hiring freezes should see a sharp pullback.
Eur Apr Sentix investor confidence –17.1 – – Confidence evaporated in Mar. Another soft print expected.
Tue 07
NZ QSBO general business situation –26 – – Confidence and trading activity set to fall.
Aus RBA policy decision 0.25% 0.25% 0.25% Policy rate on hold; QE will be the focus going forward.
Mar AiG PSI 47 – – COVID-19 disruptions to hit hard.
Feb trade balance A$bn 5.210 3.750 3.500 Exports and imports to be disrupted by COVID-19.
Chn Mar foreign reserves $bn 3106.72 3096.25 – Little changed despite market volatility.
US Feb JOLTS job openings 6963 – – Pre-dates COVID-19 shock.
Feb consumer credit $bn 12.021 13.500 – Auto loans to come under pressure as COVID-19 shock hits.
Wed 08
NZ GlobalDairyTrade auction result –3.9% – – Futures markets signal another decline in prices.
Apr ANZBO business confidence –63.5 – – Early result, covers the first week of the lockdown.
Aus Feb housing finance approvals 4.6% 2.5% 1.5% Market was tracking well ahead of the virus shutdown.
Thu 09
Aus RBA's Financial Stability Review – – – Six-monthly update comes at a time of exceptional instability.
UK Feb trade balance £mn 4212 – – Trade flows to exhibit significant volatility hence.
US Mar PPI –0.6% –0.3% – Surprised to the downside in Feb.
Initial jobless claims 6648k – – To be watched closely following two record breaking weeks.
Feb wholesale inventories –0.5% – – Final read; prelim showed solid unwinding.
Fri 10
NZ, Aus Good Friday – – – Public holiday, markets closed.
Chn Mar PPI %yr –0.4% –1.3% – Upstream prices continue to decline.
Mar CPI %yr 5.2% 4.8% – Disrupted demand, low oil prices to apply downward pressure.
Mar foreign direct investment %yr –25.6% – – FDI flows to drop sharply and remain weak given COVID-19.
Mar new loans, CNYbn 905.7 1775.0 – Credit growth to accelerate in coming months ...
Mar M2 money supply %yr 8.8% 8.7% – ... as authorities encourage economy back to work.
US Mar CPI 0.1% –0.3% –0.2% Expected to fall as demand slows; well below target.
06 6 April 2020 Weekly CommentaryContact the Westpac economics team.
Dominick Stephens, Chief Economist Paul Clark, Industry Economist
+64 9 336 5671 +64 9 336 5656
Michael Gordon, Senior Economist Any questions email:
+64 9 336 5670 economics@westpac.co.nz
Satish Ranchhod, Senior Economist
+64 9 336 5668
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