Tuesday, December 22, 2009

New Zealand Economy - Emerging Recovery

With New Zealand 3rd quarter GDP out today, it is an opportune moment to reflect upon the economy of this small developed island nation. The figure came in up +0.2% quarter on quarter in September, this was below consensus estimates of +0.4%, but a few had picked this lower number on the basis of weak manufacturing and construction sectors. The number compares with +0.2% in the June quarter (revised up from a preliminary +0.1%). The figures are unimpressive, but warmly welcomed after 5 consecutive quarters of negative quarterly growth.

The chart above shows the magnitude of the recession in New Zealand. A key driver of the recession in New Zealand was the collapse in commodity prices; particularly whole milk powder (with New Zealand being the largest exporter of dairy products) - indeed the main source of volatility in exports is not volume but prices.

Breaking into the details the drivers of growth were (expenditure basis) private consumption (+0.5), government consumption(+0.1), and inventories (+0.1). Detractors were residential building (-0.2), fixed assets (-0.1), and net exports (-0.2). On a sector basis the winners were finance, insurance and business services(+0.4), and fishing, forestry and mining (+0.2); while the main losers were manufacturing (-0.2) and construction (-0.2).

Moving on from GDP data, yesterday saw the balance of payments data released. The data showed a remarkable turnaround in the current account deficit. To illustrate, the chart below shows current account as a % of GDP. In Q3 it fell to -3.1% vs -8.4% in September 2008.

Helping this turnaround was the first quarterly surplus in about 20 years. BUT, and I emphasis BUT!... The key drivers of this were:

1. Imports falling faster than exports (consumers buying less - with unemployment at 6.5%, and things pretty tight it's hard to splurge);

2. Profits of companies falling (the New Zealand banking sector is largely Australian owned, so any change in profitability shifts the investment surplus/deficit around);

3. A couple of the large banks making provisions for decisions relating to large tax avoidance cases (this had a huge one-off affect, but even after excluding this the trend remains the same, with the previous two points being the fundamental drivers).

So what lies ahead for the New Zealand economy?

The government has provided conditions that are facilitative of a recovery e.g. stimulus, tax cuts, productivity task forces, capital market development task forces. But a key obstacle for the New Zealand economy is the exchange rate - it is currently over 0.70 against the US dollar, but it needs to come down so that New Zealand can export it's way back to a higher sustainable growth level. In the near term we are likely to continue to see a series of small growth figures like the last two quarters. New Zealand has left its recession but the medium term outlook is for more subdued growth.

On an interest rate outlook New Zealand once had one of the highest interest rates in the developed world, subsequently slashing from 8.25% to it's current 2.50% during the crisis. With subdued growth and inflation also relatively subdued at 1.3%, and within the RBNZ's target range, there's no huge pressure to bring official interest rates back to neutral yet. That said, the choice pick is for an increase in the 2nd quarter of 2010 - and indeed the RBNZ in its most recent statement changed its tone, indicating the middle of next year, versus the later half.

Overall the New Zealand economy is on the slow road to recovery, there were some improvements in the current account deficit - but these were for the 'wrong' reasons, but at least the 5 quarter run of negative quarterly growth has been broken. The key threats are high exchange rates, commodity price volatility, and potential for unemployment and credit levels to drag down consumer spending. On the upside is higher export prices, and a recovery in consumer and business spending in line with vastly improved confidence.

With a more business friendly government recently elected, and conditions generally facilitative of growth, the outlook for the New Zealand economy is fair to good.

Graph Sources:
1,2,3: Statistics New Zealand - http://stats.govt.nz/

Article Source: http://econgrapher.site1.net.nz/nzecon23dec.html

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