Summary of key points: -
- The alternative NZ economic outlook for 2025
- Mixed US jobs data cements in another Fed rate cut
- NZ versus Australia economic fortunes changing
The alternative NZ economic outlook for 2025
The pessimistic outlook for 2025 from the mainstream forecasters is that the New Zealand economy will struggle to pull itself out of recession, the US dollar will remain strong under the Trump regime policies and therefore the Kiwi dollar remains below 0.6000.
Here is an alternative (albeit minority) view that the 2025 economic and currency market environment plays out in an entirely different fashion.
New Zealand economic recoveries from recession back to positive growth always start in the provinces and are nearly always driven by increasing agricultural export prices lifting rural incomes. Up until very recently, it had been a very tough few years for our farmers with low product prices, higher on-farm costs and higher interest rates. Dairy prices were down due to weaker Chinese demand and lamb prices were pushed down by the Aussies flooding our export markets with their excess supply of lambs at cheap prices. Those soft market conditions are very much in the past. Today, farm-gate prices for lamb have lifted from well below $90 per head 12 months ago to above $120 (YM grade), bull beef has increased from $5.70/kg last year to just under $7.00/kg today and the milk price is now trading over $10.00/kg milk solids for the 2024/2025 season, well above the $8.00/kg payout of the 2023/2024 season. There are estimates that the increase in the milk price over the last three months alone brings in an additional $4 billion into rural New Zealand.
The rapid turnaround in fortunes with increased prices in the primary sector has been due to a number of positive developments all culminating at the same time. Chinese domestic milk production is down this year after strong production last year, therefore they need to import more milk powder. European and US dairy export volumes are down, and we are seeing increased demand from the Middle East and Asia. The Australian lamb supply has dried up and the lower NZ dollar against the USD, Pound and Euro is lifting lamb prices. New Zealand’s fruit exports in the month of October were 314% higher than in October 2023. Zespri are forecasting higher crop returns across all kiwifruit categories with a record crop of more than 190 million trays to sell.
To top the good news story off, even the weather gods have been kinder this year for primary production after some tough years with drought and cyclones.
It is no simple matter in agriculture to suddenly increase production to take full advantage of the higher prices, however investment and spending in the provincial cities and towns will be increasing into 2025. The increased economic activity in the regions is likely to deliver an overall GDP growth rate closer to 2.00% in 2025 in our opinion, well above current consensus forecasts ranging from 0.00% to 1.00%.
Export commodity prices have always been the dominant influence on New Zealand’s overall GDP growth performance. However, that dominance was distorted by the record low interest rates in the Covid years driving a boom in housing and retail. Over the last two years the inevitable higher interest rates to control the inflation caused by excessive fiscal and monetary stimulus in 2020 and 2021, coupled with lower export prices, contributed to the recessionary economic environment. The New Zealand economy is now finally moving on from that disruptive era of wild swings in interest rates causing abnormal economic volatility.
Since its free-float almost 40 years ago in March 1985, the Kiwi dollar has largely had its direction determined by our export commodity prices and our interest rate differentials to the rest of the world. However, over the last four years as the Covid pandemic drove identical fiscal and monetary responses, the Kiwi dollar lost its previous interest rate attraction for carry-trades. The US dollar side of the currency pair has absolutely dominated NZD/USD movements over the last four-year period and as a result the previous close correlation of the currency to our export commodity prices has completely broken down. Now that the Covid distortions have ended and US interest rates are returning to more normal “neutral” levels, there is a reasonable probability that global foreign exchange markets may start to seek out the potential for superior economic performance as a reason to buy one currency ahead of another. The recent sharp increase in our export commodity prices that is set to lift our GDP growth performance next year may soon start to come onto the radar screens of the currency investors.
The timing would be favourable for foreign investors looking at New Zealand economy in a new light in 2025, interest rates are rapidly reducing and the NZD/USD exchange rate at 0.5800 is more than 10% below its seven-year average.
Countering the positives is the fact that our largest export market, China, is by no means back to full noise. Our second largest export market, Australia has been forced by their own monetary policy errors 18 months ago to hold interest rates higher for longer and that is slowing demand for some of the products we send across the Tasman Sea. Several commentators cite our dual budget and Balance of Payments Current Account deficits as a reason to remain negative on the NZ dollar outlook. An export boom that produces stronger GDP growth ultimately removes any worries about growing deficits.
Trump euphoria has pushed the US dollar higher and the NZD/USD exchange rate to the bottom end of its 0.6300 to 0.5800 trading range of the last two years. The gap between our USD export commodity prices and the NZD/USD exchange rates is currently the widest it has ever been, resulting in an upcoming export boom for the New Zealand economy that most are failing to recognise.
Mixed US jobs data cements in another Fed rate cut
Yet again, the headline numbers that attract the media and financial markets attention do not tell the full story when it comes US employment data. The 227,000 increase in jobs over the month of November as measured by the Non-Farm Payroll survey of business firms was marginally above prior consensus forecasts and caused some initial USD buying in the currency markets. The bounce back of new hires in November, following the hurricane-hit loss of jobs in October, was arguably not as strong has many were expecting.
However, a closer examination of the second measure of US employment, the household survey, produced a much more subdued picture. The unemployment rate inched up to 4.20% from 4.10% due to a lower participating rate (fewer folk looking for work). Over the last two months, the household survey has reported a 700,000 decrease in jobs, the most since the onset of the Covid pandemic. Whilst layoffs remain generally low in the US economy, companies such as Cargill and General Motors have recently announced plans to reduce staff numbers. It is also taking longer for unemployed Americans to find work. The number of folk unemployed for more than 27 weeks has increased to the highest level in three years.
The Trump regime’s answer to a slowing labour market in the US is to “Make America Great Again” by increasing manufacturing jobs from the tariffs on imported product. Unfortunately, that policy did not work in lifting US manufacturing (or decreasing their trade deficit) in the 2016 to 2020 Trump term, and it will not succeed this time either.
The US interest rate market has shifted its pricing on the probability of a 0.25% cut by the Fed at their 18th December meeting from 50% 10 days ago to 90% after the jobs data last Friday. Expect to see the US dollar come back further on its Dixy Index from its current 105.95 level in the lead-up to the Fed meeting. Looking ahead, US inflation figures for the month of November this Wednesday night 11th December should see another 0.20% increase, leaving the annual headline rate at 2.70%. However, the annual rate of inflation is poised to drop sharply again when the elevated +0.30% December 2023, +0.40% January 2024 and +0.40% February 2024 figures drop out of the annual calculation over coming months and are replaced by much lower monthly increases in the 0.10% to 0.20% region (rents and gasoline prices reducing). US FX and bond markets have been pricing-in an expectation of higher inflation in 2025 due to import tariffs. Over coming months, actual inflation results will be the polar opposite of that market pricing. For this reason alone, we still forecast a weaker US dollar value as the markets recalibrate on the medium-term inflation outlook.
US monthly CPI inflation – November 2023 to October 2024
NZ versus Australia economic fortunes changing
Last week’s Australian GDP growth data for the September quarter printed weaker than expected at an +0.80% annual increase, sending the AUD/USD exchange rate down one cent to fresh lows below 0.6400. The Kiwi dollar held up somewhat better in the face of general USD gains to only depreciate half a cent from 0.5880 to 0.5830. As a consequence, the NZD/AUD cross-rate lifted from 0.9070 to 0.9130.
Peering ahead into 2025 a likely scenario is developing for the NZD/AUD cross-rate to move higher, the opposite to the current consensus view that the RBNZ are cutting interest rates aggressively, whereas the RBA are holding their rates stable until April/May next year, therefore the AUD outperforms the NZD, and the NZD/AUD cross rate goes well below 0.9000. The reason behind our contrarian outlook is that over the second half of 2025 the RBNZ will be well finished with interest rate cutting, however on the other side, the RBA will be progressively reducing their interest rates form the current 4.35%. The change in the interest rate differential will be the opposite to what has occurred over recent months. FX markets are always looking ahead to future economic conditions and performance. If our optimistic outlook for an export-led recovery in New Zealand’s economic performance turns into reality, we could be looking a whole lot more attractive than Australia.
Historically, dips in the NZD/USD cross-rate below 0.9000 never last too long. The depreciation of the NZD to 0.8960 against the AUD three weeks ago may prove to be the low point for the next several months. The New Zealand interest rate market and NZ dollar FX market has already priced-in another 0.50% cut by the RBNZ in February, whereas the Australian interest rate market has yet to fully price the cuts coming next year.
The differences in commodity prices between Australia and New Zealand has also dramatically changed over recent months. As the chart below shows, the direction of the commodity price differential between the two economies has swung back enormously in New Zealand’s favour.
Daily exchange rates
Select chart tabs
*Roger J Kerr is Executive Chairman of Barrington Treasury Services NZ Limited. He has written commentaries on the NZ dollar since 1981.
2 Comments
Great article. Although contrary to the majority view, Roger Kerr makes some points that many economists have not considered.
It is important to remember that if Labour/Greens get in next election, they will further reduce our livestock numbers which contribute so much toward our economy. The Left does not seem to make the connection between our export market and their computers, laptops, cars and other conveniences which are paid for with our earnings.
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