Four months on from when the global pandemic forced shutdown of the New Zealand economy there are still a stack of unknowns, uncertainties and risks ahead of us. However, arguably the economic situation today is considerably better than the dire picture painted for us by most economists back in March and April.
Looking ahead, the following eight questions for the NZ economy (therefore, in part, for the NZ dollar value) require some analysis and balanced answers: -
1. What happens after the wage subsidies end and the retail sugar rush is over?
Consumer spending has rebounded more dramatically over recent months than most imagined. The reasons for the bounce are apparent now, however they were not so obvious in advance. (a) Kiwis spend $9 billion per year in overseas holidays (European and Pacific Island holidays at this time of year in particular), this winter that money is being spent in the domestic economy. (b) The residential property market has not tanked as all the gurus predicted - due to lower mortgage interest rates, returning expats buying houses and job insecurity not being as bad as originally feared. (c) Outside of foreign tourists, life in New Zealand has pretty much returned to normal and so has consumer behaviour.
The retail rebound appears sustainable over coming months, as again outside of the tourism/travel sector, job losses are not looking as severe as earlier forecasts. Overseas travel is off the agenda for a while and the cash saved is being spent elsewhere. It is always about confidence for consumers (and thus business) and that is why the Government needs to make some decisions and announce their ongoing support programmes (for those who genuinely need it) for the economy after the wage subsidy scheme ends on 1 September.
2. What is behind the massive rallies higher in NZ shares and the NZ dollar when the economic outlook is so uncertain?
The local financial and investment markets are reflecting where investors with cold hard cash to deploy are preferring to invest their funds. NZ dividend stocks are in hot demand as the alternative investment homes of bank deposits and bonds offer close to zero yield returns. A number of our large listed companies are also beneficiaries of the new world order (e.g. F&P Healthcare and A2 Milk). The offshore investors into our shares and dollar are also providing a signal that our economy is poised to outperform others due to the dominant trade connection to China, who (as expected) are well ahead in economic recovery terms compared to the US and Europe. The markets generally provide a clearer and more accurate picture of future conditions than economic forecasters.
3. Has our local political risk suddenly increased?
Up until very recently “political risk” was observed as being relatively low for the Kiwi dollar exchange rate. Jacinda’s “kind and sharing” public popularity providing a sleep-walk to a sole Labour victory or a return of a Labour/NZ First Coalition at the upcoming 19 September general election. Latest polls point to NZ First disappearing and the Green Party potentially replacing them in a coalition with Labour. Should that result occur and the Greens secure big policy concessions in the post-election coalition negotiations, the Kiwi dollar is likely to depreciate as anti-farming, anti-business and anti-development policy changes damage the economy and investment. Expect to see increased FX market responses to political opinion poll trends over coming weeks.
4. Why is China so important to the NZ economy?
It is no coincidence that the NZ economy has enjoyed on average higher GDP growth rates over the last 12 years since the China/New Zealand free trade agreement was signed in 2008. Our exporters have direct access to 400 million middle-class consumers of imported food. Our importers of consumer products from China receive the benefits of manufacturing economies of scale. Booming exports and lower inflation are good news for everyone in New Zealand. The argument that our economy is overly dependent on one market and we are at enormous risk if something goes wrong in China does not wash with the writer. As the response to the coronavirus pandemic has shown us over recent months, the Chinese are much more disciplined and organised at dealing with crises/shocks than our American friends.
5. Will we import global deflation?
The economic theory goes that a global recession results in lower prices for goods and services as consumer demand wilts. The RBNZ will be building-in global deflation to their updated forecasts on NZ inflation when they deliver their upcoming Monetary Policy Statement on 12th August. Will they be correct in that assessment? The current world economic downturn is different to all previous recessions. Faster down and faster back up. Commodity prices have not reduced as the theorists would normally expect, many have increased! Supply challenges are in abundance and New Zealand’s inflation is always supply side driven, not demand driven. The view is that we will not import deflation to the extent most predict and domestic (non-tradeable) inflation continues to run at +3% per year.
6. Where is the Government’s economic plan?
Most pundits would agree that the Ardern/Robertson Government team of two made smart decisions in respect to the March health emergency and life-support measures for the economy. However, time is moving on and we still seem to be waiting on the Government’s plan for the recovery phase for the economy. Election campaign tactics delaying Government policy announcements is currently frustrating business who is seeking more certainty on the future landscape. Or, it could be that there is no plan and the Government is relying on “hope” that the economy will recover without doing anything differently to the past. The universities have a plan for re-booting their large foreign student industry, however the Government is not taking any risks ahead of the election.
7. Is it good luck or good management that the agriculture export sector is the saviour of the economy?
It is with considerable irony that the Government is now lauding the agriculture/horticulture export industries as the good guys who saved the economy from oblivion. Not so long ago the relationship between the Government and the rural sector was strained due to anti-farming policies on carbon, water and resource consents required to itch your bum! Agriculture science has always been the backbone of our economic well-being and will continue to do so through forward-thinking rural woman and men who seek new ways to sell quality food and products to the world. Luck really does not come into it.
8. Will US dollar value shifts still dominate NZD/USD exchange rate movements?
Absolutely! Over the month of July, the US dollar suffered its worst month in the FX markets for over a decade – down 4.4% against is biggest peers. The US’s poor response to the Covid-19 pandemic and a for a host of other reasons cited by this column over many months, the US dollar is undergoing a paradigm shift in value as the deficit and debt chickens come home to roost. The USD has weakened 6% against the Euro from $1.1200 to a high of $1.1900 over the month, by comparison the NZD has only gained 3% from 0.6500 to a high of 0.6700. The Kiwi dollar’s underperformance vis-à-vis other currencies against the USD is due to the proximity of our election and the lack of speculative interest in the currency at this time. In the short-term, the USD is due for a correction upwards after its recent sell-off, therefore there is still a greater probability of an NZD/USD pull-back to 0.6500/0.6400 from the current 0.6625 spot rate. In the medium term (three to nine months) the US dollar still has a lot further to depreciate, resulting in a higher NZD/USD rate. A US dollar Index down to 80 (currently 93.5) would have the NZD/USD rate at 0.7500.
*Roger J Kerr is Executive Chairman of Barrington Treasury Services NZ Limited. He has written commentaries on the NZ dollar since 1981.