Westpac chief economist Dominick Stephens ponders what Brexit might mean for NZ, now sees August OCR cut as much more likely

Westpac chief economist Dominick Stephens ponders what Brexit might mean for NZ, now sees August OCR cut as much more likely

By Dominick Stephens, Westpac chief economist

While results are not yet confirmed, it is looking likely that the UK referendum on EU membership will return a "leave" result. 

Financial market reaction so far 

Global financial markets are shocked - Brexit was considered unlikely before today. The UK pound has fallen 10% against the US dollar, and the euro has fallen 3%. A general "risk off" reaction has resulted, so the New Zealand dollar has fallen 3% against the US dollar. The balance has left the New Zealand dollar up 7% against the UK pound. Share prices in the Asia Pacific region are down 3% (Australia) to 8% (Japan). No doubt the financial market reaction will deepen when European markets open. 

Global interest rate markets have reacted by pushing credit spreads wider, while expectations of interest rate hikes from the US Federal Reserve have been pegged back. In New Zealand, pricing has moved decidedly in favour of an OCR cut in August, which seems reasonable at this stage. Markets have also moved to price in some chance of the OCR falling below 2%. 

What is next for the UK? If the leave camp is successful in the final count, withdrawal from the EU does not occur immediately. The referendum is not legally binding - exit from the EU will require a Parliamentary vote. After that, the UK has two years to negotiate the exact the details of exit and establish new agreements on the likes of trade. So we face a protracted period of uncertainty around business and trade arrangements in Europe.

Uncertainty while negotiations are completed could result in increased volatility in financial and economic conditions. Furthermore, during the negotiation period the UK would still be bound by existing and new EU legislation, but would lack the ability to influence policy. 

What does this mean for NZ?

If Brexit is confirmed, the nervous global environment is likely to see the New Zealand dollar fall further against the US dollar in the days ahead. In time, the uncertainty will also result in higher bank funding costs for New Zealand. This means that although NZ two-year swap rates are falling, mortgage rates and business lending rates are unlikely to fall as far (or may not fall at all).

Financial market nervousness is likely to affect New Zealand business confidence surveys in the near future, although whether that actually translates to hiring and investment decisions remains to be seen. 

The Reserve Bank is likely to factor all of this into its thinking on the OCR. Yesterday we regarded the August OCR decision as a close call, but today an August OCR reduction seems much more likely. 

What Brexit would mean for NZ exporters is very difficult to say. Suggestions that the UK will now trade more freely with New Zealand seem overconfident and premature to us. Existing trade agreements would remain in place for some time while the UK and EU negotiate the exact nature of exit arrangements. So at least in the immediate aftermath of the vote, NZ’s trading relationships with the UK and the EU will be unaffected. 

Beyond this, the nature of NZ trade with the UK and EU would depend on what sort of trade deals we negotiate. However, it’s hard to envision much upside for New Zealand exports to the UK. In the near term, uncertainty is likely to weigh heavily on prospects for the UK economy, potentially dampening NZ exports. And while New Zealand would have the opportunity to negotiate new goods trade agreements with the UK and EU, with a swing toward protectionism in recent times, it’s difficult to see New Zealand being afforded more favourable trade conditions in either jurisdiction. So we will withhold judgement on what this means for New Zealand's merchandise exports.

What we do know is that the UK accounts for a much larger share of New Zealand's tourism sector than it does merchandise exports. The large drop in the UK pound versus the New Zealand dollar, combined with the likelihood of a weaker UK economy, will impact UK tourist arrivals into New Zealand. So for the short-run at least, we regard Brexit as a negative for New Zealand's external sector. 

By the numbers 


· The UK takes around 3% of New Zealand’s merchandise exports (around $1.7bn). Key exports include sheep meat, wine and produce. 

· The UK also accounts for around 9% of New Zealand’s service exports (around $1.5bn). This mainly relates to tourism, with around 90,000 visitors from the UK last year. 


· New Zealand purchased around $1.3bn of goods (around 3% of merchandise imports) and $0.9bn of services from the UK last year (around 5% of total services imports). New Zealand’s imports from the UK mainly relate to vehicles and machinery, as well as tourism.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Wait one month...and write this article again. These situations are very difficult to predict this early. One month to get some more clarity.

1 year perhaps ?

Yeah. There's another vote been taken. REGREXIT! The morning after Vote!

Well you can expect to see the UK companies start to close down their operations here in New Zealand, as the NZD will be too strong against the Pound.

A reasonable summary, although I don't imagine Britain suffering as much economically as many pundits believe. It is not in the Germans' interests in particular, to try and punish the Brits. Wolfgang Schauble, seemingly the most powerful person in Germany recently, has stated that even with a close remain vote, Europe needs to change.
George Osborne, the British Chancellor (or Minister of Finance) has made some ridiculous threats of action in the event of a Leave vote, but he is almost certainly the first main political casualty, and they will get someone sensible in instead. David Cameron actually has mostly acted honourably through the campaign, and should stay.
For New Zealand, I think Westpac are correct that there won't be a sudden groundswell to buy NZ stuff, although if the Europeans bungle negotiations, there may be an emotional switch back to the commonwealth. I don't expect the French and Germans to really bungle things though. Among other things many countries are contemplating exiting the Euro currency, and some including the Netherlands, also contemplating a Nexit. Not a time for Brussels to play tough.
The NZD is a problem for NZ, while there are opportunities in any case to stimulate things here monetarily. I would strongly prefer the RBNZ printed money to buy back NZ Government debt; and then to finance infrastructure spending, rather than further inflate housing bubbles with an OCR cut. But they do need to do something, and if the blinkers mean the OCR is their only tool, then dropping it urgently would seem very appropriate.
In the meantime, I'm off to buy some shares in the UK. They look a fantastic buying opportunity.

Hi Stephen, you make very insightful comments, do you mind telling what background you have in Economics if any ?

Yvil, Very nice of you to say. I made stage 2 economics in a commerce degree 35 years ago, but since have been informed by practical experience and self study. I try to consider things from first principles, and not be too constrained by current paradigms of thought, which really do stuff up economies.
I rarely disagree with Paul Krugman, a New Keynesian; and have been impressed by L Randall Wray of the University of Missouri in explaining Modern Monetary Theory. In simple terms he sees money as a necessary lubricant, and as a way of keeping score, but not actually a fundamental magical building block of an economy. Those blocks are an economy's infrastructure and resources- labour and materials. Often an economy will get stuck, and so needs more lubrication. A central sovereign government has an infinite ability to supply that lubrication. The ways in which many governments, very much including New Zealand's, are supplying some extra lubrication are in my view sub optimal for our current circumstances.

We wish for a 10% devaluation.

Call-Me-John won't be holding any referendums any time soon.

He doesn't listen to them any way.

Oh hey! Flag!

Next Greece to leave...etc etc etc

Well, you can guarantee there will be more wanting referendum. Interesting times continue

So will all the Europhiles now looking at restricted access to to the UK be turning with covetous eyes to NZ. Won't be too hard for the clever Continentals to cotton on to enrolling in a mickey mouse 2 hr a week degree such as learning English when they already speak it better than most kiwis.
The possible upside is what I saw when I was in the computer section of the Aberdeen library about 5 years ago watching the Euro gals Skyping away to Poland, Hungary etc. I thought I was at a supermodel convention.

the status quo - 1% have been upset by the people = the silent majority have spoken - the initial reaction is knee jerk and will settle down in a couple of months

the devaluation actually means that exporters are immediately far more competitive - so the businesses that are generating income to the country are happy - importers are not mmmm maybe manufacturing in the UK will get a boost - more jobs - The regional discrepancy means Scotland 62% remain and + in every region will now get its independence as part of the process - and Sweden and Holland - both pre exit countries will find the courage to hold their own votes -
the EU political unity experiment is over - it will revert back to the common market and a trade zone instead - which was actually very successful

Cameron will be a lame duck prime minister with Boris the anointed one after this result -

UK will hiccup for a bit - but then recover strongly as its able to set policy in a manner that promotes its growth not Europe as a whole -

Downside is a 52/48 split and the bitterness means this is not going away anytime soon - and lots of very deep wounds that will take a long time to heal!

Exactly my view. This has been an exercise to out the ant-democratic we know best for you crowd.

R.O.C. aka Rate of Change, in NZD/USD since Brexit gives a clue.

The UK and Europe are stuffed in near term. I expect more wealthy Europeans will want to move over here.

Don't count on it. Though you can expect to see a drop off from Brits moving to NZ as they generally will not be able to afford to move now with the Pound being so low. Apparently at its lowest since 1985.

They're more likely to move to OZ now, well at least there's career opportunities over there and the salaries are much better.

Why would anyone want to move to NZ if they can't afford to live here!

The Mercer cost of living index was published a couple of days ago. I looked at the index and it was just a ranking - with no data. While looking for the index I found another index


which had rankings attached under various categories. One was cost of living - where Sydney and Auckland ranked approximately equal and another was local purchasing power where Sydney was higher than Auckland. Under rent Sydney was higher. The best of the major cities in Oceania was Melbourne . If you looked at local purchasing power only against the rest of the world Sydney ranked 124 and Auckland ranked 195.

The cost of living in the new Elysiums will be high. I see lots of cheap places in India.

Zachary, you do realise that end of the film Elysium. The Rebels revolt against the Elite and take over Elysium. And in the real world this tends to happen too, when you have such huge disparities over rich and poor.

So what's your plan, do we just keep building more walls and high fences, increase security systems and end up like South Africa?

a big component of his whole campaign was immigration and the british having to bow to brussels.
a lot of comments coming from leaders of the left saying they have got the message now
good on them, it will be interesting to watch other members of the EU that are against high immigration to see if that sparks change in brussels to keep them happy.
when you look at the voting map makes interesting reading, http://www.telegraph.co.uk/news/2016/06/23/leave-or-remain-eu-referendum...
I would say if we voted about slowing immigration Auckland would be blue the rest would be red


Shonkey Jonkey could well be history next year or earlier! He needs to sit up and take notice - much of the Brexit outcome was to do with open borders and mass immigration. There is a rapidly growing feeling across NZ and particularly within Auckland that the current open border policy National is presiding over is out of control. Many wonder how their children will ever afford a house and the Chinafication of NZ is becoming of great concern but few are prepared to vocalize it for fear of being declared a racist.
Will be very surprised if Key continues to show up so strongly in the popularity stakes over the next few months. Strongly feel that this is Keys final term in power and he will go out on a landslide victory to a conglomeration of opposition parties. We could well see a new party formed that will make an immediate impact with popular policies that are anti immigration, pro NZ resident only house buying etc etc.

How many times have you been surprised over the past few years Bigblue, alot I suspect

Mr John Key is our Prime Minister, show some respect. You may not agree with his leadership but being disrespectful to our leader reflects poorly on YOU


respect is earned, not given lightly.


He, and his supporters are just god damn traitors! IMO
Everything they have done, are doing, is not and has never been in the interests NZ born citizens. They are the party of disenfranchisement. Key and National should see this result as a warning. You are next.

You may well be right Justice.

However looking at the way the vote in England panned out I would hazard a guess as to say many voted with their hearts as opposed to their heads. London voted against it, the rest of England voted for Brexit.

Sadly I think this will have the most impact on those that can least afford it. They will be the ones that bear the repercussions in the next few months and years.

Secondly lets get one thing straight. Auckland is under the control of a left leaning, immoral, incompetent Mayor. A limp wristed council support him. The issues facing Auckland right this minute are a direct result of Councils mismanagement.

The main issue is around land supply. Land that currently comes on stream is very expensive. This is because as council designates farmland from rural to urban, it instantly makes the farmer an instant millionaire. This profit, or mark-up needs to be removed. This was the case in the 1950s. The public works act needs to be repealed and Council, or State purchase the land and develop it without this massive mark-up.

This is why developers only build high value homes. There is no profit in affordable housing. To get scale, land needs to be released in high quantity, and developed fast. No one would build a $100k home on a $500k section. National know this. Council also know this yet do nothing?

Pressure from central government has been building on Auckland Council for the past couple of years to sort their shit out. They have done nothing. Key has lost patience and is now getting involved, as are Smith and co. I expect to see National continue ramping up pressure on Council over the coming months. And actively get involved, and legislate accordingly.

Lets get another thing straight. National are the democratically elected government. They have the ability to legislate. That is their role. Local government must then follow those laws. The Courts then enforce those laws through applying them when private citizens test them in court, and precedent is set. Key is basically saying to Brown "bring it on".

Personally I think this is fascinating

We live in interesting times.

It is not unlike the situation London found itself in when London become a super city under Livingston, and it soon became apparent the London mayor actually had a great deal of power, and coercion when government were enacting statute.

Auckland, and New Zealand are in a similar position. It is a power struggle between central, and local government.

I fully support John Key and what National is doing. Council have become a massive bottleneck for growth.

Brown, and Key could well be in to their last term? Again they have nothing to lose?

Having said that love him or hate him, John Key is the only politician I see whom I believe has the intellect, drive, and ability to see this through.

The rest are Muppets.

Compelled... So the "main issue" is land supply and Gonzo, is the only man to get it sorted out? That is fantastic... I need a drink...

It's official. Cameron stepping down. Says vote must be respected

Expect to see an early cut to the OCR and fixed mortgage rates around 3.5% as a result of the Brexit. It's just a matter of time. RIght now float - it's too early to fix.

all markets are down, is this the start of GFC2 start those printing presses

GBP will be volatile.


NZ Herald editorial resonates

Brexit was a revolt against immigration and the Shengen "open borders" protocol
For every able British person to do a job, there are 50 immigrants who will do it cheaper.

It was a revolt against prescriptive elitism
Brexit was a movement with a place for the everyman to stick it to the banks, the political elites, the financial elites, and the corporations who've been prescribing ideology to the masses.

David Cameron acted honourably and resigned

Like our own Flag Referendum, it was an opportunity for the country to collectively say "get stuffed" to the Government


John Key did not act honourably and resign

If Key reads the mood correctly he will not stand at the next election - don't imagine he would like to be voted out and will prefer to leave quietly.

I hope Brexit is just the beginning for Britain and the spark that will reignite the European spirit. The union should have been about preserving and developing all things European instead it became plain to see that it is the enemy of European culture and European people. If it is allowed to continue Europe will be destroyed.

Maybe with a Trump win we can see the old Allies united once again to defeat a wayward Europe. Hopefully this time we can persuade them to join us in not just making America great again but Europe great again too. Europe needs to build a wall.

Trump has suspended running and has turned up in scotland

Maybe he thinks Scotland needs another golf course

He probably already owns it.
Green fee's get tiresome.
Why rent when you can buy?

trump has two there, heaps of press waiting on his arrival

Then he plans well. Nothing wrong with that.
Pollies live on the press.
Voters have to know who they are voting for.

showed up in Scotland who voted to remain, first thing he said good result voting to leave

A smart operator will always hedge their bet.

Yes did you see all the protesters gathered on his arrival.

Before Mr Trump arrived, Keir McKechnie, spokesman for Stand Up to Racism Scotland, said: "His message of hate is one that we'll challenge and we would not encourage anyone to support him in his presidency.

"We want to represent people across the whole of the UK and beyond who reject Trump's racism and Islamophobia."

BBC were not shy on mentioning he is a billionaire, and a presumptive Republican Nominee.
Perhaps it's them, the (BBC), that have an agenda.

I'd rather quote Trump at the time:
"People are angry all over the world. They're angry over borders, they're angry over people coming into the country and taking over and nobody even knows who they are.

Oooh scary looking protesters

Did you ever see "You've been Trumped". I'm surprised he wasn't tarred and feathered and put straight back on the plane

@ Zachary: What do you man "Europe needs to build a wall"?

Brexit is largely a result of Europe's failure to secure its borders. Europe needs to fortify its Eastern and Southern borders. The wall presents a physical resistance but it has also become a symbol of resistance. The wall protects one's identity. That's why Trump has been so successful with the concept and has built a movement around it.

Uk Labour party in disarray as strong labour seats voted to leave.

so FTSE dropped 8% recovered to only 4.3% down and still 150 points higher than it was early last week- hardly chicken little territority - and turns our 75% of the income of these companies is from overseas - mining oil etc and will benefit from a lower sterling!


what brexit shows us is that democracy is more important to the people than the economy.

And we are in real, real trouble should that not be the case, I don't think British people are alone in having that niggling feeling it has become the other way round, even here.

UK Bank stocks collectively down by around 15 to 20%. just today.
Tells you a lot.

Amongst my friends I generally seem to be the odd one out.
I totally understand Brexit.
Most I know think its an idiotic call

Huge shame. Only time will tell if it is the right move but I'm not convinced. It took them years to recover from the GFC and they were still getting back on their feet. This takes them back a long way.

The GFC is ongoing. People still watching know this is true. The bail outs, QE, nirp, zirp are all still symptoms of that failure. This result is a symptom of that failure.

When you say "them" clearly it was not all of them, as enough felt bad enough to want out

As always, Spengler over at Asia Times is worth a look: http://atimes.com/2016/06/britain-bests-brussels/

Splenger is a good read indeed. Thanks waymad.

I think the UK is probably right but means at least 5 years of pain. Those that voted for Brexit know it.I would be selling any Euro assets of I were to have any as I can't see the EU surviving.

they may go through pain but they will come out the other side stronger.
they now will be able to make decisions that benefit the UK over having to bend to fit in with the wider group

Hope this works for you guys

I would not be surprised if now the EU has to make far more concessions to keep the remaining members than it would have, to keep Britain in the Union. Greedy, arrogant -----s, serves them right.

Courageous move by british voters, but probably a no brainer. Britain fought two world wars to protect democratic freedoms. Interesting how world markets are reacting as though this is a disaster , or is it only a disaster for the globalist bubble?

Merkel doesn't like it. Brexit that is. Can't handle that the UK has all around sea borders Unlike Germany.

Not for long. The UK's biggest export is about to become Scotland and Northern Ireland.

It's game over.

Yip. The Captain of the ship has bailed out.
All tennis and G&Ts for lunch for him.
Leave the plebs sort out the mess.
Such is life.

The leaders of Scotland and Ireland seem very keen on replacing their native populations with refugees and other poor folk from around the third world. I'm not sure why. Possibly the English and Welsh have reached a sort of limit that the others haven't quite got to yet.

I think it is the same issue, they are controlled by London, and wish to be able to make their own decisions. They see the Franco/German Empire as their saviour to deliver them from the tyranny of English rule. Seems fair enough to me, but you would have thought the example of Ireland would have cooled their ardour. I mean would you rather be a Franco/German colony or an English colony after what they did to Greece?


“I think it’s comprehensible why this happened: first, no one wants to feed and subsidize poorer economies, to support other states, support entire nations,”

“Apparently the British people are not satisfied with the way problems are being solved in the security sphere, these problems have become more acute lately with the migration processes,”

The Russian president's comments come in reply to UK Prime Minister David Cameron’s claims that “Putin would be happy if the UK left the EU.

Huge mistake to say that about Putin. A lot of people think Putin is a great guy and talks a lot of sense. A lot of people realise the intervention in Libya was a disaster. A lot of people are opposed to allying with al Qaeda in Syria. A lot of people see Merkel as an insane tyrant.

Before long they will realise that ISIS is no less legitimate, nor any less violent, than the Assad, Saudi, Iranian, or Saddam dictatorships. Time to recognise them as a state?

Once every one, especially women and kids, who don't want a bar of them are allowed to get away from them first, then allocate them a bit of turf. They may find they have little or no means of reproducing themselves then. Might work.

That's the problem. Can't kill them without killing the women and kids, so what to do? It is an awful situation, but remember Saddam killed millions in his war with Iran. Plus ca change, desperately unfortunately.

I think there is no need for panic stations. They haven't become enemies overnight. Just a rational reassessment of relations. Trade will continue, exchange of people will continue, co-operation will continue just as it is with any two sovereign nations. Europe needs England more and Germany and France would drive the negotiations with an interest to retain the ties. It all depends on the next leader in UK.
The upside is more meetings, more travel, more tourism, more money in experimenting new ways to stay connected.
UK may become a better conduit for trade/money into EU, but on better terms for both ?
I can see the Black Swan slowly becoming Fair and Beautiful, given some good nurturing..

There Dutch and Danish will have referendum and it will result in a streamlining of the EU back towards the intial objective of being a common market. Brussels got above its station.

I expect the EU will try to make this as painful as possible as an example to the other states in the union. Britain will need some good leadership over the next few months.

In which case you will have a bit of a taste of how globalization is to "work". Very totalitarian, so that no-one dare try to get out again. Looking forward to it, anyone?

Italian guy was on CNBC saying that but he shut up when joe asked why Italy and some other countries were allowed in when they lied about their GDP etc to get entry.
his answer Italy would be poorer without being in, and theres the answer the poor countries want the GB and Germanys to leech off rather than sort out heir own mess
you can have free trade and movement of people without the EU, plenty of countries do it now

Poor Jo Cox, her constituency voted to leave:

Jo Cox, the Brexit Vote, and the Politics of Murder

If you want to get anywhere in politics now you have to go Identitarian. The people have had enough of rampant stupidity and globalism
The UK can become a fortress of freedom and broadcast its message to all of Europe. The Eastern European countries will be easy to sway. Russia will be an ally. Encouragement and assistance can be given to nationalist groups and parties working within Europe. The UK and the US should pull out of NATO. Work should start immediately on investigating whether it is possible to press charges against Cameron, Blair, Sarkozy and others for war crimes, waging wars of aggression and endangering Europe.

Whew! Its all OK John Key says impact on NZ from Brexit will be minimal - he is a former money trader so he must be right eh? All good.

Brexit is the first step.
And now the UK has had enough. A fight back.