By Roger J Kerr
The New Zealand economy is again rapidly approaching one of those situations that we have seen before.
What we now have is a two speed affair where lower agricultural commodity prices cause falling incomes and tight cashflows in rural/provincial regions.
At the same time low mortgage interest rates/strong immigration fuel a housing boom in Auckland, and thus carefree borrowing and spending form the increased (on paper) asset values.
Unfortunately, no-one has yet designed a two-forked monetary policy management tool to cater for the two extremes.
What we do know is that when rural incomes (and thus business investment and jobs) decline it takes 12 to 18 months for that economic downturn to feed into the large cities of Auckland and Christchurch.
Being a civil service town, Wellington never experiences these booms and busts. And that is why the Government bureaucrats and some politicians do not understand very well what drives the NZ economy.
Christchurch is a special case with the earthquake re-build, and thus potentially distorting some of the indicators and measures of the economy.
Therefore, the RBNZ is right to be on hold indefinitely with interest rate changes and needs to buy some time to see how and when the lower rural incomes over the next 12 months transfer into the Auckland property bubble economy.
What we do know is that the real income, and thus wealth generation, in the New Zealand economy almost solely comes from the heartland industries. Therefore the RBNZ should be taking stock of the current status and outlook for those industries.
• Meat export industry – Adverse climatic conditions down the east coast have caused a temporary short-term boost to livestock slaughter rates, however with serious negative consequences for production levels in the medium term. The sheep meat industry is finally examining its ownership and structure; however the advantages from these potential changes are a long way off.
• Dairy industry – Offshore price volatility and a lower milksolids payout this past season will cause renewed caution about future investment and expansion. New irrigation projects are critical to harness our natural water resources into land usage and production.
• Forestry industry – Log prices are down again as Chinese demand softens.
• Oil and gas industry – The 50% drop in crude oil prices will be curtailing exploration and investment activity.
• Manufacturing industries – The prolonged period of Australian dollar weakness against our currency is starting to bite into manufacturing exporters’ profits and confidence as legacy currency hedging runs out. Many find it impossible to achieve product price increases (to compensate the adverse exchange rate impact) in a generally soft Aussie market.
Let’s hope the RBNZ economists are examining these specific industry trends and not merely focusing on national macro-economic trends which are distorted by the Auckland and Christchurch bubble sub-economies.
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Roger J Kerr is a partner at PwC. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com
9 Comments
At last - somebody who recognises where the money in New Zealand comes from. The Heartland industries.
On this site sometimes you might think that few of our common taters recognise that at all.
Yes we would like to see the IT and other people export at volume. But try as they might it has not really become significant yet.
Pick a company, chances are they have HQ in Auckland. A portion of the spend in the rest of the country gets sent to Auckland, less flowing from the regions means less to go around in Auckland. Think of Auckland as a suction pump with hoses stretching out to the regions, sucking in proceeds from all the regional transactions.
No they not a service industry.
They a "non-tradeable" cost center. Provinces could do much better without the Auckland-factor but many of the business we're forced to interact with insist on putting their highest paid people in Auckland, the place with the highest expenses.
We say that we don't want the HQ there, that we don't want their newsletters, newspapers, sponsorships, advertising, "community donations", fancy offices and over-priced company cars - but it's like telling the rain not to be wet. The ones making those stupid decisions and busy work to justify their existence ARE the overpaid deadweight in Auckland.
Christchurch is already in slowdown mode, companies are doing less business then this time last year. I'd say the countdown of 12-18 months started 6-8 months ago. By Christmas time things are going to get serious. It's already getting serious in China, commodity countries (NZ Aussie Canada) are going to take a king hit. Interestingly these countries also have housing bubbles of epic proportions.
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