NZ coming off the boil

There was a time through 2014 and early 2015 when New Zealand was dubbed a 'rock-star' economy to be envied and studied by its regional neighbours for its 'magic recipe.'

Stable Government, a booming dairy industry and continued moderate economic reform seemed to have set the stage for year after year of 3 per cent plus economic growth, falling unemployment and double-digit house price growth in its biggest city.

"The shine has started to rub off that star heading into a winter that could prove challenging for some, particularly in dairying."
Bernard Hickey, Publisher at Hive News

But the shine has started to rub off that star heading into a winter that could prove challenging for some, particularly in dairying.

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Signs have been filtering through for months but that bad news crystallised in June with the Reserve Bank of New Zealand's surprise cut in the official cash rate.

Just a year ago New Zealand's economy was growing so strongly the RBNZ went against the grain of monetary policy easings in most of the developed world by hiking its key rate 100 basis points in just over three months, arguing it wanted to normalise rates and control a feared rise in inflation.

Instead, consumer prices actually fell 0.3 per cent in the March quarter and the annual inflation rate dropped to 0.1 per cent, so far below the 2 per cent midpoint of the RBNZ's 1 to 3 per cent target range that Governor Graeme Wheeler was forced to act.

Then on June 19 Statistics NZ reported the economy only grew 0.2 per cent in the March quarter, the slowest quarterly growth in two years and well below market and RBNZ expectations for growth of 0.6 per cent. Annual GDP growth fell to 2.6 per cent, the slowest growth rate since late 2013.


So what went wrong? How much more shine could come off New Zealand's star?

The oil price halved through the second half of 2014, which gave consumers a boost in their disposable incomes and juiced spending but also hit exports of oil, which it may surprise some to know is New Zealand's fourth biggest export earning commodity after dairy, meat and logs.

Secondly, a short sharp drought in early 2015 temporarily hit dairy production and dairy makes up about 6 per cent of GDP and 20 per cent of exports.

The dairy pain is far from over however. Since the end of the March commodity prices have fallen more than a third, surprising most economists and Fonterra, the dairy giant. They had expected a rebound as global production responded to lower prices and Chinese demand returned.

Instead, demand from China remained curiously weak and supply from Europe continued to suppress prices. That's because milk that was being exported to Russia as cheese is being diverted into milk powder export to the Middle East and Asia, where Fonterra dominates. Russia's retaliatory ban on European cheese imports looks set to remain in place indefinitely given the standoff over Russia's Ukrainian activities.

Fonterra's announcement in late May of a lower milk payout forecast for 2014/15 and a lower than expected forecast for 2015/16 helped suppress business and consumer confidence going into the winter.

Thirdly, business investment has come off the boil in a lagged reaction to last year's rate hikes and as business confidence has fallen. Also, the residential rebuild in Christchurch after the earthquake devastation of 2011 is coming to an end and the rebuild of commercial buildings in the CBD is yet to hit full swing.


The news is not all grim. Record high tourist arrivals over the Chinese New Year and a spending surge from the Cricket World Cup boosted retail spending 2.4 per cent during the first quarter and the rest of the export sector is riding high with the combined benefit of firm commodity prices and a sliding New Zealand dollar.

Finance Minister Bill English has noted the weak GDP growth but was quick to argue the economy remained on track for 2.5 per cent to 3 per cent economic growth, driven in part by an export sector – aside from dairy – that is basking in the sun of a weaker dollar.

The Kiwi has fallen from US78c to a five year low US69c since the beginning of the year. And most importantly for manufacturing exporters and tourist operators targeting Australians, the New Zealand dollar has also fallen from a record near-parity high of A99.5c to A89c.

English pointed to strength in tourism, international education, wine exporting and in the IT industry, which he said was growing at an annual rate of 15 per cent.

"You have to remember that our export sector has been geared up around an US80c-plus," he said.

"It has become lean, mean, and productive, and now that the exchange rate is dropping relatively quickly, I believe the prospects for export growth are pretty good," he said.

The prospects for lower interest rates will also help both those in business and in the housing market.

The weak March quarter figures prompted economists to forecast more interest rate cuts later this year. ANZ Chief Economist Cameron Bagrie, who forecast the June 11 cut, now expects three cuts in 2015 to 2.75 per cent.

Fixed mortgage rates have fallen and banks have passed on the cash rate cut in full to floating mortgage holders.

Not that home buyers in Auckland at least need much encouragement. April and May were record months for real estate agents as strong net migration and a shortage of 30,000 homes combined with falling fixed mortgage rates to pump the annual inflation rate in the City of Sails up to 19.8 per cent.

House price inflation elsewhere is more modest at below 5 per cent, although RBNZ moves to ease low deposit lending restrictions outside of Auckland is expected to give regional New Zealand a boost.

New Zealand may have hit a rough patch early in 2015 but most remain confident of solid growth through into 2016 as the automatic stabilisers of a lower currency and lower interest rates work with the boost from higher household incomes and net wealth to soften the blow of lower dairy prices.

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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