New Zealand Quarterly Economic Check-up: Mildly Positive With Attractive Alpha Equities

New Zealand just saw the release of two key economic statistics: its current account and Gross Domestic Product. While both data points were mildy positive, due consideration needs to placed on the detail in order to understand the outlook and implications for investing. On GDP, the New Zealand economy grew 0.2% q/q in the December 2010 quarter (-0.2% 3Q10), placing it up 0.8% year on year (1.5% 3Q10). Meanwhile the current account came in as -2.3% of GDP (from -2.2% in 3Q2010).

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New Zealand Economy: Onwards, and Slightly Upwards

New Zealand recorded its 4th quarter of positive GDP growth with 0.6% q/q for the March quarter of 2010. This matched consensus estimates, but was down slightly from the 0.9% recorded in the December quarter of last year; reflecting the somewhat subdued economic recovery, following one of the worst recessions in decades. On a year-over-year basis, growth accelerated to 1.9% from 0.5% in the previous quarter (rebounding from -3.1% in the March quarter of 2009).


The result shows the recovery (which follows a 5 quarter recession) becoming more entrenched, but some sectors are doing better than others. On a quarterly basis the winners were: Fishing, forestry, and mining - up 3.2%, Manufacturing - up 1.6%, and Wholesale trade - up 1.4%. The losers were: Electricity, gas, and water - down -2.2%, Retail, accommodation and restaurants - down -0.8%, and Government administration and defense - down -0.6%. On an annual basis construction continues to suffer, down -5.4%, while cutbacks on spending has put government administration and defense down -1.0%. The standout was fishing, forestry, and mining - up 10.4%, and manufacturing - up 4.3%.

The data follows the release of the current account balance yesterday. The data showed New Zealand holding a current account deficit to GDP ratio of -2.4%; the lowest in more than a decade. The key drivers were slightly improved GDP position, and more notably cyclical improvements in the current account deficit (i.e. lower investment earnings going offshore due to lower corporate profits, and a lower trade deficit (now a surplus!) due to falling imports driven by a drop in demand; but also by reasonably strong export performance), assisted by one-offs related to bank structured finance tax court cases. As previously noted, the likely outcome is for a return to larger current account deficits later this year as the cyclical factors begin to unwind.


So the key takeaway is that the New Zealand economy is in recovery mode; both in the traditional sense of the word, and in somewhat of a healing way, as some of the old bad habits of high spending, low saving, and over-investment in property come home to roost. The recovery will likely persist, but growth wont return to the sorts of levels seen before the crisis for some time yet, as consumers still need to undergo a period of de-leveraging, and getting the savings rate back into the black (from deep negatives).

So the path of monetary policy has also begun to turn, with the Reserve Bank of New Zealand increasing the OCR by 25bps to 2.75% in its June meeting. The outlook is for probably another 50-100bps this year, but due to the sluggish nature of the recovery the new neutral is probably going to be lower. But overall for the New Zealand economy the message is; onwards, and slightly upwards.

Sources
Econ Grapher Analytics www.econgrapher.com
Statistics New Zealand www.stats.govt.nz

Article Source: http://www.econgrapher.com/24jun-nzgdp.html

New Zealand Current Account Fall Reflects Stronger Earnings

New Zealand's current account data surprised some with the current account deficit for the year through December 2009 coming in at -NZ$5.47 billion versus consensus estimates of -NZ$3.33 billion, and the September quarter figure of -NZ$5.9 billion. The comparable figure in December 2008 was -NZ$15.97 billion.

Seasonally adjusted the current account balance during the December quarter was -NZ$3.11 billion, versus the small positive of NZ$0.04 billion in the September quarter of 2009.


The Current account deficit as a percentage of GDP also improved in December 2009 to a 8 year low of -2.9%, compared to consensus estimates for -2% and September's -3.2%; and a marked reduction from -8.7% in December 2008.

However this improvement will only be short lived as it is entirely driven by cyclical forces and one-off events. The current account deficit will undoubtedly widen again through 2010 and will likely return to levels greater than -5% as a percentage of GDP by the end of 2010.


The positive balance in September was partially made possible by large one-off tax provisions by the banks after a couple of large Australian owned banks lost court cases brought by the New Zealand Inland Revenue Department over structured finance transactions and tax avoidance.

Cyclical forces also played a critical role; New Zealand has a net international investment position of -90% as a percentage of GDP, thus if company earnings fall then so to will current account outflows... this is a bad way to improve the current account deficit.

The current account balance was also influenced by the goods balance which saw a marked turnaround due to imports falling faster than exports. New Zealand generally tends to have fairly stable exports; dominated by agriculture i.e. the volumes are fairly stable, but what has the most influence is soft commodity prices. Thus this was driven mostly by falling demand for imports.

Already the balance on investment income (-NZ$3.39billion) has returned to levels seen prior to the crisis driven by performance of direct investment (e.g. company subsidiaries in New Zealand). Another interesting point in the release was that the amount reinvested by international investors in direct investments in New Zealand grew to a record NZ$1.5 billion.

So to sum up, the New Zealand current account deficit improved, but primarily due to cyclical forces; the deficit will widen again through 2010 as the New Zealand economy recovers. The only thing that will structurally improve it is: less spending on imports, more exports, and more saving (yes KiwiSaver will help) from both the private and public sectors.

Sources:
Statistics New Zealand www.stats.govt.nz
Econ Grapher Analytics www.econgrapher.com

Article Source: http://www.econgrapher.com/26mar-nzcurrentac.html

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