ASB economists admit last year’s “Rockstar” economy is cooling, but say we hardly face an economic meltdown.
They’ve made this call in their ‘Quarterly Economic Forecast’ released today.
While weak dairy prices and a levelling off in Canterbury construction activity are contributing to a slow-down, they say the economy will be bolstered by falling interest rates and a weaker New Zealand dollar.
ASB chief economist, Nick Tuffley, expects economic growth to drop from an annual average of 3%, to 2% this calendar year, but rise to a “healthy” 2.9% in 2016.
He maintains the Official Cash Rate (OCR) will keep falling from 3.0% where it’s at now, to 2.5% by the end of the year, and possibly further next year.
He expects unemployment to remain at around 6%.
Overall, ASB is taking a more optimistic approach towards the economy than Westpac, which in its quarterly Economic Overview released last week, said the tides were turning and New Zealand was set to go down the same path Australia’s been on since its mining boom started unwinding.
Westpac economists expect GDP growth to fall below 2%, the OCR to fall to 2% and unemployment to rise to 6.5%.
Upsides to the downsides
Tuffley acknowledges New Zealand’s facing some very tough times.
Yes, dairy prices have hit rock bottom and there’s an increased likelihood their recovery will be modest, altering the spending outlook for the regions dependent on dairy incomes.
However Tuffley says, “While the current season will be challenging and a drag on the economy, we anticipate the slower production growth globally should eventually restore balance in global dairy markets and drive a recovery in prices over 2016”.
ASB economists yesterday came out saying they expect the price of whole milk powder to nudge out of its slump, and increase by 5% to 10% at the GlobalDairyTrade auction overnight.
As for the Canterbury rebuild reaching its peak this year, Tuffley maintains a small slowdown in construction should be largely offset by increased building activity in Auckland.
Weak NZD supports exporters
Tuffley says “to muse there ain’t no sunshine would be to miss the substantial array of positives for growth.
“The trade-weighted exchange rate has fallen 16% from its high a year ago, with much of the fall happening since April. Export industries across the board have become more competitive in a relatively short space of time as a result.”
Key commodity exports, including beef and kiwifruit (especially as the PSA virus is under control), remain robust.
“Tourism, now vying to be our biggest foreign exchange earner, was already going from strength to strength before that NZD fall. Chinese consumers may not be buying a lot of our milk at present, but they are flocking to NZ in droves to look at cows (and other fauna and flora) in their natural habitat,” says Tuffley.
Increased residential construction in Australia should also be beneficial for NZ manufacturers.
Gradual recovery among overseas trading partners
ASB sees “gradual economic recovery from our major trading partners”.
It acknowledges it is concerned about China’s economic growth decelerating to 6.8% over 2015.
These worries have been intensified by wide-spread speculation that actual growth is substantially below official estimates.
Tuffley says the Chinese equity market plunge will have a limited direct impact on the Chinese economy and very little consequence for our exporters, as it has a relatively low participation rate.
He says, “Australia continues to delicately manage its transition away from mining-investment led growth to a broad-based economic recovery”.
As for the US, the economy is starting to recover, with jobs growth and low interest rates supporting consumer spending and housing demand.
“However, the recovery remains reasonably fragile with business investment and exports still soft, in part reflecting the recent lift in the USD”, he says.
ASB points out “Eurozone developments have been overshadowed by the political drama resulting from Greece and its debt negotiations”.
Other signs of economic buoyancy in NZ
Looking at other economic indicators, ASB says net migration flows will remain strong, even if Australia’s economic recovery gains enough momentum to draw more New Zealanders across the Ditch.
Tuffley says strong net migration will boost the labour supply and see the unemployment rate remain at around 6% over the coming year.
Consumer spending should also be supported by population and employment growth.
Furthermore, Tuffley says “cashflows for borrowers – including beleaguered dairy farmers – will be bolstered by falling interest rates, helping to support overall spending”.
While the Auckland housing market is expected to remain tight, he expects lower interest rates will “modestly” stimulate activity outside the super city and Canterbury over the coming year.
As for inflation, ASB expects medium-term inflation to settle at just under 2% – it’s currently close to zero.
“Imported inflation has remained subdued due to low global commodity prices and the high NZD”, says Tuffley.
“The recent drop in the NZD is expected to temporarily lift imported inflation over the next year. Meanwhile domestic inflation pressures remain muted, due to ample capacity and strong competition.”
NZD to remain weak against USD and strong against AUD
Looking further down the track, ASB expects interest rates will drift higher once the Federal Reserve lifts US rates later this year.
In the meantime, ASB expects “the NZD/USD to continue to fall toward a low of 0.61 as NZ dairy export prices remain weak, the Reserve Bank cuts rates and the Federal Reserve lifts rates.
“The NZD/USD is likely to trough around the first half of 2016, before lifting gradually as NZ export prices recover over the next few years.”
While the RBNZ is starting to ease rate, the Reserve Bank of Australia’s easing cycle has likely been completed.
Tuffley says, “The NZD/AUD is likely to remain around the high 0.80s over 2015 and 2016.
“However in the near term, concerns about Chinese growth and low commodity prices could see the NZD outperform the AUD, and see the NZD/AUD move to the low 0.90s on occasion.”
39 Comments
Yes , but .............we cant take a she'll be right attitude , there are too many variables .
We need to diversify the economy ( into financial services and new tech industries such as robotic manufacturing, and IT development like Ireland has done)
We need a Silicon Valley which must be an EPZ WITH TAX INCENIVES to get it off the ground and research tax breaks too
We need more value add to dairy ( eg ; cheese instead of powder )
What if :-
1) China goes into a recession
2) They stop buying milk
3) The Eurozone floods our market in China
We have relied on a narrow base of food commodity exports for far too long and we need to recognise this weakness both from a risk pint of view and that it keeps us a low wage economy .
I guess we can look at the current situation as a rebalancing act by the invisible hand. While dairy, which many worry we are overly dependent on, obviously suffers, other export sectors are benefiting enormously from the lower dollar. This is a natural rebalancing of the economy that many people overlook, and opposition parties obviously choose to ignore.
It is also important to consider how do we achieve diversification. I would say just chanting at the government can hardly achieve it - especially a lot of the chanting are for things that actually harm the diversification/competitiveness efforts. NZ is no doubt one of the most expensive places to live in the developed world, even if you take out the AKL property factor, and despite the low wages. Pretty much everything, other than access to nature, is expensive here, from vegetables to public services/regulation. Why would talents, or businesses, want to move here, basically in the middle of nowhere? We should pay close attention to where NZ's core competitiveness lie, whether what we want are realistic, and also HOW to achieve these. There is a proverb of people wanting to go south, but their actions actually lead them north.
Auckland still measures high on quality of life, which is a good reason for talent to move here. I work in software development and the quality of life is what attracted me to New Zealand, despite the high cost of living and low wages (which seem to have caught up with the UK in my industry, if you exclude London). I've found that New Zealand has fewer hidden costs too, especially when compared to the UK.
Couldn't agree more with Boatmans comments. The problem with milk and pine is that it's easy for others to do. They may not have our favorable climate but with cheaper labor and transport costs they can certainly compete. A highly educated workforce and a knowledge based economy is the way for New Zealand to secure a bright future. Being remote isn't a barrier when exporting knowledge services.
Relying on the free market to balance things will take us through a lot of pain and it may not happen quickly enough. A clever tax regime, like Ireland's would definitely help.
"Tuffley says strong net migration will boost the labour supply and see the unemployment rate remain at around 6% over the coming year."
So the crazyness continues. The rest of the world strugles with over population, but the fools running this place think it's an answer to our problems. havent they been listening to the impact of robotics on jobs and so on....God I dispair.
Perhaps ASB's chief economist has never ventured into the New Zealand countryside. Maybe he takes absolutely no interest in our environmental well-being. Possibly he has no understanding of why New Zealand is attractive to international tourists.
"Chinese consumers (he says)... are flocking to NZ in droves to look at cows (and other fauna and flora) in their natural habitat.”
I venture that no-one bar foreign farm buyers makes the trip to New Zealand to look at cows. It's true that soon, if we continue the way we are, visitors will have little else to look at. But I doubt we'll have much luck in pushing this as a tourist attraction.
New Zealand's own flora and fauna are generally in catastrophic decline. Our fresh water resources are fast becoming uninhabitable for their dependent native species. The health of our lakes and rivers, anywhere near dairying - though not entirely because of dairying - is an international disgrace and worsening. The ecosystem consequent to intensive dairy farming is fortunate to support anything more than grass and flies.
Unless people as influential as this economist start to take an interest in the environment upon which all of our well-being depends, there will be little point in talking about our economy at all.
True, xingmowang, we are fortunate in our national parks. If the government was doing anything - bar dropping 1080 - to conserve these parks, we could be relatively satisfied. But government interest in them is well exhibited in its attempts to mine within these areas, as well as severely constraining the budgets and thus the conservation efforts of DOC. Custody of these parks requires more than casual involvement or indifference.
Bingo
For economic prosperty into the future, if NZ is smart, it will need to clean up its waterways, ban GM crops, and NZ will have a niche market which could lead to an economic future that would be the envy of the world
As air, soil and water of the rest of the world becomes increasingly polluted, NZ's remoteness can become an increasingly valuable advantage - which needs to be protected - at all costs - regardless
New Zealand's single most overarching trade advantage is its clean-green un-polluted environment
NZ's govt tourism promoters have spent years establishing New Zealand's 100% pure brand
Strategically thinking and looking out 5 to 10 years that "branding" will be the one single advantage New Zealand has. It needs to protect it
Last week there was a discussion here on interest.co.nz about Fonterra and its reliance on commodities instead of developing promotable products, and the differences between commodities and "promotable products"
If Fonterra sticks to simply producing commodities, then in 5 to 10 years possibly the only thing Fonterra will have going for it will be that "branding" that has been cultivated by others without any help from Fonterra
It is incumbent on New Zealand "collectively" together with Fonterra to protect that image
Mate you need to get out more. "New Zealand's own flora and fauna are generally in catastrophic decline. Our fresh water resources are fast becoming uninhabitable for their dependent native species. The health of our lakes and rivers, anywhere near dairying - though not entirely because of dairying - is an international disgrace and worsening."
As pointed out to Kate the other day - in the last decade for every ha of land that was converted from sheep to dairy in Canterbury another additional ha was taken out of production altogether. I wonder how many townies have stepped foot on that locked up land since.
"Out of all the OECD countries, New Zealand has the highest proportion of its land area protected for conservation purposes."
http://www.mfe.govt.nz/more/environmental-reporting/land/area-native-la…
I assume by "retired" land you are talking about the high country tenure review process;
http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10369639
If so, what on earth do you think that has to do with water quality? Are you trying to imply that this process has served to improve water quality in Canterbury?
I just don't see the "despoiled vast tracts of the Canterbury Plains and its surrounding ecosystems" that your were wringing your hands over Kate. especially when so much land has been locked up in the last decade. Nor do I see Workingmans doom laden view of the country side.
So your point about "retired" land was just a crock - and you are quite right - you can't "see" ecosystem destruction where water quality is concerned. And by "despoiled" landscapes - well, yeah, some folks might consider miles of canals surrounded by fields upon fields of irrigators as a picturesque landscape, I suppose.
I can't see "ecosystem destruction" because there isn't any. We've been catching trout out of our creeks for generations whether the farm was dairying, sheep or back to dairying again. Best water quality under the pines. The worst the pukeko riden duck ponds. If there was any 'ecosystem destruction" I would doubt I would be still catching trout. But hey it is only first hand experience - as opposed to doom mongers trying to out scare themselves.
Fish and Game seem to think it does. You know trout as key indicator of waterway health and all that.
http://www.fishandgame.org.nz/newsitem/trout-key-indicator-waterway-hea…
Every scientific inquiry into the state of our rivers and lakes, from that of the Parliamentary Commissioner for the Environment, to this new one I heard discussed on National Radio today -
http://phys.org/news/2015-08-freshwater-life.html - is conclusive on this issue. Google the matter.
The fact is, we are trashing our freshwater resources as if there were no tomorrow. And the problem is going to get a lot worse before it gets better. And, this said, there is very little consensus as to how they might get better under the impact of unrestrained dairying expansion.
Great that some land is being retired in Canterbury. But it doesn't come close to the land area being converted nationally. Landcorp's current conversions on pumice in the central north island - though these may have hit a financing snag - will practically do for the Waikato/Taupo catchment, as the fertiliser, nitrogen and other effluent inexorably seep towards this.
We have the largest % of of our land locked up in the OECD - how is that an "international disgrace" as you put it? How much do you want locked up? Yeah dairy on pumice is a bit of a dud idea from a nitrate leaching perspective. Nothing that a free stall barn system wouldn't sort out.
That link actually supports my point about the Canterbury Plains;
The generally lowland and relative flat environments of the ‘Eastern South Island plains’, ‘Central well-drained recent soils’ and ‘Western and Southern North Island lowlands’ environments have less than 1 per cent of their environment as legally protected land with native land cover.
How does that support your point "despoiled vast tracts of the Canterbury Plains and its surrounding ecosystems"? Ever been there?
That "devastation" sure is breath taking.
https://www.google.com/search?q=canterbury+plains&biw=1252&bih=576&sour…
Here is some Canterbury Region devastation history for you.
"Human impact on vegetation
After the arrival of Māori, fires destroyed forests on the plains. They were replaced by tussock grassland, which spread from alpine areas. Other native plants such as matagouri, kānuka, mānuka, kōwhai and wild Spaniard thrived after the fires.
When Europeans arrived, less than one-tenth of the region was forested."
While weak dairy prices and a levelling off in Canterbury construction activity are contributing to a slow-down, they say the economy will be bolstered by falling interest rates and a weaker New Zealand dollar.
Have they got any proof? - if not, at least some corrective growth analysis. Otherwise the chatter is tiresome and unproductive.
Despite two waves of yen devaluation, exports fell at 16.5% annualized rate in Q2 (Q/Q) which is worse than feared. Much of that decline was auto activity and general flow to China. Read more
Profile, as others have pointed out, your comments, links, etc, are irrelevant to the freshwater issue. There is no argument to be had here. The facts are plain.
If you're defending dairying, good on you. We need dairying - but maybe we could do with more intelligent dairying. Signwriting 'towards sustainable dairying' on Fonterra's cars is a start, but it needs carrying through. Actions, not words. We also need a dairy industry that has some will and ability to pay for its damage, and not pass the costs of its destruction to society. (Why should I and every other tax- and rate-payer pick up the bill? In every other sector, the polluter pays.) We also need some focus on value rather than volume. And value is strongly and increasingly linked to environmental standards.
About the freshwater (and I'm not a ecologist, I'm a businessman) I do know that once you kill the smallest creatures in the rivers and lakes (which we're doing on a massive scale), you kill the next things up the food chain - the fish, the birds, the native plants that need the birds, etc, etc. We can think this is no matter, and get on with city life, but I for one don't relish the prospect of life without hearing a native bird or seeing a native plant without driving for ten or twenty kilometers. And this, whether you believe it or not, is what is happening through vast tracts of our land.
Yes, iconoclast, but we can make a difference. The past isn't there to go back and fix it, but we do have the present and future. I don't do much, but helping these groups with their 'inland islands' of freshwater, bush and other native flora, where it's possible to get some sort of native bird life re-established, is a start. I just don't see the environment as a 'greenie' issue, but something that underpins the genuine health of our economy and, thus, our society. A dairy industry set up for volume not value is no way forward.
Sounds a bit more reasonable workingman. Sure we would do with some more intelligent dairying. But we could do with less of is chicken little "catastrophic decline", "uninhabitable", "international disgrace" and other over the top statements. Plenty of commenters here already have a mortgage on that sort of rhetoric.
Stream health. " In New Zealand rivers, the presence of many mayfly and caddisfly larvae is a sign of a healthy river ecosystem, while a preponderance of snails and chironomids indicates the opposite.
Figure 5.3 shows changes in MCI in rivers between 2000 and 2010.
Most sites show no change over this decade. There are a number of purple dots in Taranaki,
where a programme of riparian planting has been underway for many years. On the other hand, the presence of red dots in South Canterbury and Southland indicates a decline in river health."
That would imply things aren't anywhere near as bad as you and Kate perceive. Our farm has gone from dairy to sheep to dairy and there has been trout (and kids) in the creeks the whole time. Yet to see any devastation.
http://www.pce.parliament.nz/assets/Uploads/Update-report-Water-quality…
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