An easing off of the exchange rate should help New Zealand exporters, but could be signalling a fall in commodity prices, which are closely linked with the New Zealand dollar, Prime Minister John Key says.
His comments come after BNZ's head of research, Stephen Toplis, said yesterday that the New Zealand economy's commodity boost looked set to falter, making him nervous about where prices for our commodity exports were headed over the short-term.
Fears that the sovereign debt crisis in the Eurozone and the faltering recovery in the United States will hurt global growth have been dominating headlines for weeks. The New Zealand dollar has fallen from from a post-float high of of 88.4 US cents at the start of August to just under 78 US cents this morning.
Key said yesterday that Finance Minister Bill English told him the mood among global economic policy makers was 'very dark' in New York, where he was meeting key players such as US Federal Reserve chairman Ben Bernanke to get a better gauge on where they thought the global economy was headed.
Speaking on TV3's Firstline programme this morning, Key, a former currency trader, said a falling exchange rate was not always a good news story for New Zealand due to the signals it put out.
"There’s a couple of things happen with our exchange rate. One is ... generally the world investment market’s been getting out of US assets and buying other assets, so we’ve been a beneficiary of that, but that pushes our exchange rate up. The other thing is we’re reasonably commodity-linked," Key said on Firstline this morning.
“So sometimes when the exchange rate goes down it’s a reflection of how bad the international markets are, or that commodity prices might be easing back, so it’s not always a one-way, good news story. But certainly the easing off of the exchange rate helps a little bit,” Key said.
'Commodity boost coming off'
Key's comments come after BNZ's Toplis said yesterday there were sufficient warning signs to make him nervous about whether strength in New Zealand's commodity prices seen over the last year could be maintained.
There was increasing evidence that dairy commodity prices had peaked, with Fonterra’s auction prices drifting lower, US supply ramping up, and demand from China dropping off over the last few months, Toplis said.
"We remain optimistic that the medium term outlook for the sector is very robust indeed but all commodity prices cycle around a trend and it looks, and feels, as if the down bit of the cycle has begun. In large part this is already acknowledged by Fonterra itself in that next year’s projected payout is some 13% below this year’s payment," he said.
If that was fully reflected in exports that would be consistent with a NZ$1.5 billion drop in export earnings for the sector. The current annual merchandise trade surplus is NZ$1.1 billion.
Forestry sector prices and volumes were also coming under some downside pressure at the moment.
"Falling demand for construction activity globally is unhelpful. Even in China there is evidence that fixed capital formation growth is slowing," Toplis said.
Apples and, especially, kiwifruit exports were enormous compared to year earlier levels. But the question would be how much kiwifruit there would be to export this time next year when the full impact of the PSA virus on production was added up?
"As has been the case for some time, the role of China will be very important in determining New Zealand’s external success or failure in the year ahead," Toplis said.
"Over the last twelve months exports to China grew 36.8%. China now accounts for 12.5% of New Zealand’s total goods exports, pulling rapidly away from the USA, which now lies a distant third at 8.5%. Over the last year exports to China and South Korea have rocketed away – whereas exports to Japan and the USA have actually fallen," he said.
'Extreme EU volatility on the cards'
Meanwhile, Key said a global double dip recession could not be ruled out as there could be some extreme volatility in parts of Europe.
“But I think the general feeling from Bill [English] is that while the atmosphere and the mood is very dark in the United States and in Europe, that we may just muddle through. I know a number of the major economic commentators don’t think that there’ll be a double-dip recession," Key said on Firstline.
“But what we are in for is a period of volatility, I suspect extreme volatility in certain parts of Europe. [We] may see a reduction in global growth – that’s certainly the view from the New Zealand Treasury and the Reserve Bank – that’ll have some impact on New Zealand," he said..
“The big challenge for us, or the interesting position for us, is whether Asia can stay de-coupled from Europe and the United States. If that’s the case, and China stays strong, then Australia will stay strong. They’re our two big markets, and growing very rapidly. That will at least help take the edge off that. It’s not perfect, it’s always better if the US and Europe is doing well, but at least we’re not as isolated as some countries are.”
'We need a capital gains tax'
Here's Labour leader Phil Goff responding to Key's comments that New Zealand should make it through the global turmoil. Goff says Labour's policies assume a lower growth track than in the 2011 Budget, and that a capital gains tax was needed to broaden the tax base.
(Updates with videos of Goff and Key on Tuesday morning in Parliament building, Toplis comments, comments on European volatility)