Six themes that will shape NZ’s economy in 2015

After a lung-busting sprint in the wake of the global financial crisis, the New Zealand economy has settled into a quick trot. It’s firmly in expansion mode and it feels like the good times could last for quite a while.

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There are new opportunities and a willingness to do what it takes to go after them. The economy is moving from legacy to opportunity amid the demands of rebuilding the second-biggest city, housing shortages in the biggest city and an overvalued currency.

"Firmly in expansion mode, it feels like the good times for the NZ economy could last for quite a while."

New Zealand has long had champagne tastes but has generated beer income with its historical focus on exporting commodities. We are now seeing significant changes to the settings that have underpinned the economy for a long time.

Driving the evolution are new connections to fast-growing Asian markets, inroads in the free trade arena and a willingness by business to realise the greatest returns from the abundant resources of the land and the imagination of New Zealanders themselves.

Here are the six big themes that will influence New Zealand’s economic prospects in 2015 and beyond.

Change is the new normal

There is no normal anymore. Fast-changing demographics, upended consumer spending patterns, shifting trade patterns and rampaging technological advancement ended normal NZ.

No normal and cyclical forces create a complicated brew requiring deft and pro-active management by policymakers and businesses.

The microeconomic agenda – both at the firm and policymaker level – will be key with fast-moving structural tensions. Leadership not populism is needed to drive reform, better growth and investment returns.

Localised focal points

The NZ economy is traditionally derailed by one of two things: a global event or a build-up of internal imbalances that require a purge.

The global risk remains real but the key imbalance indicators – household debt, the current account deficit, credit growth, household savings to name a few – suggest structurally NZ’s not in bad shape.

There are still a lot of what-ifs: will the NZD fall further? Where’s the inflation? Are too many NZ eggs in the China basket?

The trend is your friend

Growth may have peaked but the trend for NZ still looks favourable. Productivity – long a weak point – has improved and this is likely to be linked to increasing capital intensity.

Despite recent corrections in global demand for protein, the trend for the terms of trade looks positive. What is likely to get relatively cheaper over the coming decade – butter and beef, or IT and cars?

New Zealand is also making greater use of its considerable natural endowment. Other drivers – a well-functioning political system, greater signs of execution on opportunities across the tradable sector, and a sound microeconomic agenda – are also pointing in the same direction.

Dairy outlook

It’s shaping up to be a comparatively rough 18 months for Kiwi farmers. Low dairy prices dominate talk of downside risk (with dry weather deepening furrowed brows in recent weeks).

ANZ projects milk powder prices to recover gradually. Cash-flow will tighten dramatically in the second half of the year requiring a cut to capital, core and discretionary expenditure. That will create some issues across the economy but it looks manageable.

Liquidity vs fundamentals

One global risk will dominate: the prospective start to the US Federal Reserve normalising US monetary policy as well as the impact that process could have on both liquidity-driven asset values and on the regions that leveraged heavily during the era of incredibly low rates.

While the Bank of Japan and the European Central Bank are still expanding their balance sheets, it’s the Fed that is ultimately the key. We expect the path for policy normalisation to be haphazard with significant volatility and a strong potential for dislocation.

Addressing income inequality

While New Zealand’s income equality may be middle of the pack globally, it’s considerably higher than two decades ago.

While a degree of inequality can be expected in any market economy, too much is not necessarily good for economic growth.

There are good economic reasons for addressing inequality, and New Zealand looks to be pushing a number of the correct buttons.

Read the full report.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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