By Roger J Kerr
The outlook for the New Zealand economy today is certainly not as gung-ho as it was at the start of 2014.
Back in January/February even the local economic forecasting group who had previously forecast six of the last two economic recessions were positive on the NZ economy!
Something was telling me back in February that the superlative economic conditions were too good to last and if the perma-bears were suddenly positive we just had to be close to a turning point.
However, I do not think any commentator foresaw the subsequent 40% plummet in international dairy prices as the factor that would slow the rock star economy down.
As we are now seeing in overseas import/export trade data and the Terms of Trade data, the combination of the higher Kiwi dollar and much lower dairy prices is reducing volumes and activity levels.
It is certainly no surprise that business confidence has come back off its record levels very rapidly indeed over recent months.
If it was not for the Christchurch rebuild to outlook for GDP growth would not be that flash.
The June quarter employment numbers were weaker than expected and job advert surveys point to a levelling off in the labour market over coming months.
Add in to the mix that the recently confirmed $6/kg milksolids payout forecast for 2014/2015 from Fonterra will need further significant falls in the Kiwi dollar or a dramatic recovery in Wholemilk Powder prices to be achievable and one can understand heartland spending/investment plans being hastily revised.
Economists are now revising down their June quarter GDP growth forecasts to +0.70% and below. Current trends in other key economic statistics support the view that we are past the peak in the strong GDP growth and thus future inflation risks have subsided.
However, further sharp falls in the NZ dollar to below 0.8000 will start to increase the price of imported consumer goods, something we have not experienced for a number of years.
It would certainly not pay to get complacent about future inflation threats. Current moneymarket pricing of interests rates out to three years forward seem to have temporarily forgotten this.
Borrowers therefore need to fix long and investors need to stay short right now.
While some sectors of the economy are experiencing a levelling off in activity levels, the tourism industry is booming on from my observation. Not even the high NZ dollar has slowed overseas tourist numbers and their spending levels.
Evidence of the tourism resurgence is seen from listed tourism company THL reporting increased profits last week, plus a few days spent in Queenstown with hoards of Aussies jamming the restaurants is sufficient anecdotal evidence for me.
Unlike some other industries who moaned a while back to all and sundry about how the high currency was hurting them, the tourism industry has just got on with it in the knowledge that you never create wealth selling on price alone.
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Roger J Kerr is a partner at PwC. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com
7 Comments
Interest rates are still very low compared to historical and healthy levels.
As soon as growth slows down all the volume of liquid money there currently is as a result of the cheap credit will go to speculation/stock market. Same as in EU, USA,...
When the productive economy does not work as expected the investment on this real economy becomes less attractive hence it's normal to suggest investors "to go short" and avoid long term deposits or investments.
When that happens many will claim that RBNZ should lower interest rates to boost the economy, but the truth is that the problem is not caused by a lack of liquid money but by the lack of attractive profit in long term investments. The problem is the physical resources limit, the impossibility of ever lasting exponential growth.
So.. inflation? Yes, but only when the RBNZ makes the mistake of lowering interest rates after people start crying again thinking that their business is not successful because of a lack of cheap money in the system.. and here we'll go again to a situation like the rest of the world where productive economy seems to be flat while stock markets are skyrocketing (until panic begins..)
The difficult part is not to know what will it happen, it's to know when this will happen. It depends on central banks all around the world and the governments and the taxpayers' anger.
The Christchurch rebuild will end soon. Next year it probably won't be that strong anymore.
Houses are extremely overpriced (especially in big cities, but housing in isolated places are not cheap either according to international standards)
http://www.economist.com/blogs/dailychart/2011/11/global-house-prices
Dairy prices go down 40% and although they might rebounce it will never be as before, especially considering the increase of production in Europe and USA. Part of the excuse for big real estate prices is the "price of the land". Well, that won't be the case when land prices go down as returns decrease.
Net migration is basically at its peak level but mainly due to less NZers crossing to Australia as its mining industry slowed down. But Australia has better added value industry than NZ so it won't take long until Australia becomes again more attractive to work than NZ.
What I suspect is that the pressure to lower the NZD will be very big once things don't work out in productive economy (mainly exporting sector). But lowering the NZD would mean that investing in NZD would become less attractive..
I don't know. The question is: Why some people believe that New Zealand is immune to the global capitalism's disease?
It's funny because most of the countries complain about their high currency level as the responsible of lower and lower exports (even Germany's export results are very disappointing despite their high tech product's elasticity and maybe soon they are not that reluctant to ECB's cash injections).
..It's like if nobody really wants to admit that maybe we've reached the limits of productive economy's growth and the only way to create "wealth" is through spceculation.
My opinion is just that in such a scenario it would be quite insane to long-term invest.
And add to the equation the Western-non western fights for economic supremacy (Iran, Russia and maybse soon China against USA-Europe-Australasia) and the choose-sides-trade-restrictions that won't help New Zealand exports
Iran was one of the best customers of NZ's fish and the industry got badly hit when USA imposed trade-restrictions with Iran. We'll see about Russia..
Risky times!
Tourism works off wealthy people Roger-the-inaccurate. They still have had high incomes even though their countries are going broke AND _they_ can finance their holidays on cheap retail loans.
Right above your picture at the moment the banner printy is "Dairy prices fall another 6%"....maybe we should not make dairy farmers special and wipe 6% off all of NZ's wages? Would anyone squeak if we put ALL income taxes up 6%??
As for the "sharp slowdown" that's just our "Rockstar Economy" having it's cocaine shot baby.
We should start to see Wheeler cranking back the OCR now that it's obvious that the economy wasn't as robust as they claimed.
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