By Dominick Stephens, Westpac chief economist
While results are not yet confirmed, it is looking likely that the UK referendum on EU membership will return a "leave" result.
Financial market reaction so far
Global financial markets are shocked - Brexit was considered unlikely before today. The UK pound has fallen 10% against the US dollar, and the euro has fallen 3%. A general "risk off" reaction has resulted, so the New Zealand dollar has fallen 3% against the US dollar. The balance has left the New Zealand dollar up 7% against the UK pound. Share prices in the Asia Pacific region are down 3% (Australia) to 8% (Japan). No doubt the financial market reaction will deepen when European markets open.
Global interest rate markets have reacted by pushing credit spreads wider, while expectations of interest rate hikes from the US Federal Reserve have been pegged back. In New Zealand, pricing has moved decidedly in favour of an OCR cut in August, which seems reasonable at this stage. Markets have also moved to price in some chance of the OCR falling below 2%.
What is next for the UK? If the leave camp is successful in the final count, withdrawal from the EU does not occur immediately. The referendum is not legally binding - exit from the EU will require a Parliamentary vote. After that, the UK has two years to negotiate the exact the details of exit and establish new agreements on the likes of trade. So we face a protracted period of uncertainty around business and trade arrangements in Europe.
Uncertainty while negotiations are completed could result in increased volatility in financial and economic conditions. Furthermore, during the negotiation period the UK would still be bound by existing and new EU legislation, but would lack the ability to influence policy.
What does this mean for NZ?
If Brexit is confirmed, the nervous global environment is likely to see the New Zealand dollar fall further against the US dollar in the days ahead. In time, the uncertainty will also result in higher bank funding costs for New Zealand. This means that although NZ two-year swap rates are falling, mortgage rates and business lending rates are unlikely to fall as far (or may not fall at all).
Financial market nervousness is likely to affect New Zealand business confidence surveys in the near future, although whether that actually translates to hiring and investment decisions remains to be seen.
The Reserve Bank is likely to factor all of this into its thinking on the OCR. Yesterday we regarded the August OCR decision as a close call, but today an August OCR reduction seems much more likely.
What Brexit would mean for NZ exporters is very difficult to say. Suggestions that the UK will now trade more freely with New Zealand seem overconfident and premature to us. Existing trade agreements would remain in place for some time while the UK and EU negotiate the exact nature of exit arrangements. So at least in the immediate aftermath of the vote, NZ’s trading relationships with the UK and the EU will be unaffected.
Beyond this, the nature of NZ trade with the UK and EU would depend on what sort of trade deals we negotiate. However, it’s hard to envision much upside for New Zealand exports to the UK. In the near term, uncertainty is likely to weigh heavily on prospects for the UK economy, potentially dampening NZ exports. And while New Zealand would have the opportunity to negotiate new goods trade agreements with the UK and EU, with a swing toward protectionism in recent times, it’s difficult to see New Zealand being afforded more favourable trade conditions in either jurisdiction. So we will withhold judgement on what this means for New Zealand's merchandise exports.
What we do know is that the UK accounts for a much larger share of New Zealand's tourism sector than it does merchandise exports. The large drop in the UK pound versus the New Zealand dollar, combined with the likelihood of a weaker UK economy, will impact UK tourist arrivals into New Zealand. So for the short-run at least, we regard Brexit as a negative for New Zealand's external sector.
By the numbers
Exports
· The UK takes around 3% of New Zealand’s merchandise exports (around $1.7bn). Key exports include sheep meat, wine and produce.
· The UK also accounts for around 9% of New Zealand’s service exports (around $1.5bn). This mainly relates to tourism, with around 90,000 visitors from the UK last year.
Imports
· New Zealand purchased around $1.3bn of goods (around 3% of merchandise imports) and $0.9bn of services from the UK last year (around 5% of total services imports). New Zealand’s imports from the UK mainly relate to vehicles and machinery, as well as tourism.
84 Comments
A reasonable summary, although I don't imagine Britain suffering as much economically as many pundits believe. It is not in the Germans' interests in particular, to try and punish the Brits. Wolfgang Schauble, seemingly the most powerful person in Germany recently, has stated that even with a close remain vote, Europe needs to change.
George Osborne, the British Chancellor (or Minister of Finance) has made some ridiculous threats of action in the event of a Leave vote, but he is almost certainly the first main political casualty, and they will get someone sensible in instead. David Cameron actually has mostly acted honourably through the campaign, and should stay.
For New Zealand, I think Westpac are correct that there won't be a sudden groundswell to buy NZ stuff, although if the Europeans bungle negotiations, there may be an emotional switch back to the commonwealth. I don't expect the French and Germans to really bungle things though. Among other things many countries are contemplating exiting the Euro currency, and some including the Netherlands, also contemplating a Nexit. Not a time for Brussels to play tough.
The NZD is a problem for NZ, while there are opportunities in any case to stimulate things here monetarily. I would strongly prefer the RBNZ printed money to buy back NZ Government debt; and then to finance infrastructure spending, rather than further inflate housing bubbles with an OCR cut. But they do need to do something, and if the blinkers mean the OCR is their only tool, then dropping it urgently would seem very appropriate.
In the meantime, I'm off to buy some shares in the UK. They look a fantastic buying opportunity.
Yvil, Very nice of you to say. I made stage 2 economics in a commerce degree 35 years ago, but since have been informed by practical experience and self study. I try to consider things from first principles, and not be too constrained by current paradigms of thought, which really do stuff up economies.
I rarely disagree with Paul Krugman, a New Keynesian; and have been impressed by L Randall Wray of the University of Missouri in explaining Modern Monetary Theory. In simple terms he sees money as a necessary lubricant, and as a way of keeping score, but not actually a fundamental magical building block of an economy. Those blocks are an economy's infrastructure and resources- labour and materials. Often an economy will get stuck, and so needs more lubrication. A central sovereign government has an infinite ability to supply that lubrication. The ways in which many governments, very much including New Zealand's, are supplying some extra lubrication are in my view sub optimal for our current circumstances.
So will all the Europhiles now looking at restricted access to to the UK be turning with covetous eyes to NZ. Won't be too hard for the clever Continentals to cotton on to enrolling in a mickey mouse 2 hr a week degree such as learning English when they already speak it better than most kiwis.
The possible upside is what I saw when I was in the computer section of the Aberdeen library about 5 years ago watching the Euro gals Skyping away to Poland, Hungary etc. I thought I was at a supermodel convention.
the status quo - 1% have been upset by the people = the silent majority have spoken - the initial reaction is knee jerk and will settle down in a couple of months
the devaluation actually means that exporters are immediately far more competitive - so the businesses that are generating income to the country are happy - importers are not mmmm maybe manufacturing in the UK will get a boost - more jobs - The regional discrepancy means Scotland 62% remain and + in every region will now get its independence as part of the process - and Sweden and Holland - both pre exit countries will find the courage to hold their own votes -
the EU political unity experiment is over - it will revert back to the common market and a trade zone instead - which was actually very successful
Cameron will be a lame duck prime minister with Boris the anointed one after this result -
UK will hiccup for a bit - but then recover strongly as its able to set policy in a manner that promotes its growth not Europe as a whole -
Downside is a 52/48 split and the bitterness means this is not going away anytime soon - and lots of very deep wounds that will take a long time to heal!
Don't count on it. Though you can expect to see a drop off from Brits moving to NZ as they generally will not be able to afford to move now with the Pound being so low. Apparently at its lowest since 1985.
http://www.bbc.com/news/business-36611512
They're more likely to move to OZ now, well at least there's career opportunities over there and the salaries are much better.
Why would anyone want to move to NZ if they can't afford to live here!
The Mercer cost of living index was published a couple of days ago. I looked at the index and it was just a ranking - with no data. While looking for the index I found another index
http://www.numbeo.com/cost-of-living/rankings.jsp
which had rankings attached under various categories. One was cost of living - where Sydney and Auckland ranked approximately equal and another was local purchasing power where Sydney was higher than Auckland. Under rent Sydney was higher. The best of the major cities in Oceania was Melbourne . If you looked at local purchasing power only against the rest of the world Sydney ranked 124 and Auckland ranked 195.
Zachary, you do realise that end of the film Elysium. The Rebels revolt against the Elite and take over Elysium. And in the real world this tends to happen too, when you have such huge disparities over rich and poor.
So what's your plan, do we just keep building more walls and high fences, increase security systems and end up like South Africa?
a big component of his whole campaign was immigration and the british having to bow to brussels.
a lot of comments coming from leaders of the left saying they have got the message now
good on them, it will be interesting to watch other members of the EU that are against high immigration to see if that sparks change in brussels to keep them happy.
when you look at the voting map makes interesting reading, http://www.telegraph.co.uk/news/2016/06/23/leave-or-remain-eu-referendu…
I would say if we voted about slowing immigration Auckland would be blue the rest would be red
Shonkey Jonkey could well be history next year or earlier! He needs to sit up and take notice - much of the Brexit outcome was to do with open borders and mass immigration. There is a rapidly growing feeling across NZ and particularly within Auckland that the current open border policy National is presiding over is out of control. Many wonder how their children will ever afford a house and the Chinafication of NZ is becoming of great concern but few are prepared to vocalize it for fear of being declared a racist.
Will be very surprised if Key continues to show up so strongly in the popularity stakes over the next few months. Strongly feel that this is Keys final term in power and he will go out on a landslide victory to a conglomeration of opposition parties. We could well see a new party formed that will make an immediate impact with popular policies that are anti immigration, pro NZ resident only house buying etc etc.
You may well be right Justice.
However looking at the way the vote in England panned out I would hazard a guess as to say many voted with their hearts as opposed to their heads. London voted against it, the rest of England voted for Brexit.
Sadly I think this will have the most impact on those that can least afford it. They will be the ones that bear the repercussions in the next few months and years.
Secondly lets get one thing straight. Auckland is under the control of a left leaning, immoral, incompetent Mayor. A limp wristed council support him. The issues facing Auckland right this minute are a direct result of Councils mismanagement.
The main issue is around land supply. Land that currently comes on stream is very expensive. This is because as council designates farmland from rural to urban, it instantly makes the farmer an instant millionaire. This profit, or mark-up needs to be removed. This was the case in the 1950s. The public works act needs to be repealed and Council, or State purchase the land and develop it without this massive mark-up.
This is why developers only build high value homes. There is no profit in affordable housing. To get scale, land needs to be released in high quantity, and developed fast. No one would build a $100k home on a $500k section. National know this. Council also know this yet do nothing?
Pressure from central government has been building on Auckland Council for the past couple of years to sort their shit out. They have done nothing. Key has lost patience and is now getting involved, as are Smith and co. I expect to see National continue ramping up pressure on Council over the coming months. And actively get involved, and legislate accordingly.
Lets get another thing straight. National are the democratically elected government. They have the ability to legislate. That is their role. Local government must then follow those laws. The Courts then enforce those laws through applying them when private citizens test them in court, and precedent is set. Key is basically saying to Brown "bring it on".
Personally I think this is fascinating
We live in interesting times.
It is not unlike the situation London found itself in when London become a super city under Livingston, and it soon became apparent the London mayor actually had a great deal of power, and coercion when government were enacting statute.
Auckland, and New Zealand are in a similar position. It is a power struggle between central, and local government.
I fully support John Key and what National is doing. Council have become a massive bottleneck for growth.
Brown, and Key could well be in to their last term? Again they have nothing to lose?
Having said that love him or hate him, John Key is the only politician I see whom I believe has the intellect, drive, and ability to see this through.
The rest are Muppets.
NZ Herald editorial resonates
Brexit was a revolt against immigration and the Shengen "open borders" protocol
For every able British person to do a job, there are 50 immigrants who will do it cheaper.
It was a revolt against prescriptive elitism
Brexit was a movement with a place for the everyman to stick it to the banks, the political elites, the financial elites, and the corporations who've been prescribing ideology to the masses.
David Cameron acted honourably and resigned
Like our own Flag Referendum, it was an opportunity for the country to collectively say "get stuffed" to the Government
http://www.nzherald.co.nz/world/news/article.cfm?c_id=2&objectid=116628…
John Key did not act honourably and resign
I hope Brexit is just the beginning for Britain and the spark that will reignite the European spirit. The union should have been about preserving and developing all things European instead it became plain to see that it is the enemy of European culture and European people. If it is allowed to continue Europe will be destroyed.
Maybe with a Trump win we can see the old Allies united once again to defeat a wayward Europe. Hopefully this time we can persuade them to join us in not just making America great again but Europe great again too. Europe needs to build a wall.
Yes did you see all the protesters gathered on his arrival.
http://www.bbc.com/news/uk-scotland-glasgow-west-36606184
Before Mr Trump arrived, Keir McKechnie, spokesman for Stand Up to Racism Scotland, said: "His message of hate is one that we'll challenge and we would not encourage anyone to support him in his presidency.
"We want to represent people across the whole of the UK and beyond who reject Trump's racism and Islamophobia."
I'd rather quote Trump at the time:
"People are angry all over the world. They're angry over borders, they're angry over people coming into the country and taking over and nobody even knows who they are.
Brexit is largely a result of Europe's failure to secure its borders. Europe needs to fortify its Eastern and Southern borders. The wall presents a physical resistance but it has also become a symbol of resistance. The wall protects one's identity. That's why Trump has been so successful with the concept and has built a movement around it.
so FTSE dropped 8% recovered to only 4.3% down and still 150 points higher than it was early last week- hardly chicken little territority - and turns our 75% of the income of these companies is from overseas - mining oil etc and will benefit from a lower sterling!
As always, Spengler over at Asia Times is worth a look: http://atimes.com/2016/06/britain-bests-brussels/
Hope this works for you guys
http://www.bbc.co.uk/programmes/p03yl1nf
The leaders of Scotland and Ireland seem very keen on replacing their native populations with refugees and other poor folk from around the third world. I'm not sure why. Possibly the English and Welsh have reached a sort of limit that the others haven't quite got to yet.
I think it is the same issue, they are controlled by London, and wish to be able to make their own decisions. They see the Franco/German Empire as their saviour to deliver them from the tyranny of English rule. Seems fair enough to me, but you would have thought the example of Ireland would have cooled their ardour. I mean would you rather be a Franco/German colony or an English colony after what they did to Greece?
Putin:
“I think it’s comprehensible why this happened: first, no one wants to feed and subsidize poorer economies, to support other states, support entire nations,”
“Apparently the British people are not satisfied with the way problems are being solved in the security sphere, these problems have become more acute lately with the migration processes,”
The Russian president's comments come in reply to UK Prime Minister David Cameron’s claims that “Putin would be happy if the UK left the EU.
Huge mistake to say that about Putin. A lot of people think Putin is a great guy and talks a lot of sense. A lot of people realise the intervention in Libya was a disaster. A lot of people are opposed to allying with al Qaeda in Syria. A lot of people see Merkel as an insane tyrant.
I think there is no need for panic stations. They haven't become enemies overnight. Just a rational reassessment of relations. Trade will continue, exchange of people will continue, co-operation will continue just as it is with any two sovereign nations. Europe needs England more and Germany and France would drive the negotiations with an interest to retain the ties. It all depends on the next leader in UK.
The upside is more meetings, more travel, more tourism, more money in experimenting new ways to stay connected.
UK may become a better conduit for trade/money into EU, but on better terms for both ?
I can see the Black Swan slowly becoming Fair and Beautiful, given some good nurturing..
Italian guy was on CNBC saying that but he shut up when joe asked why Italy and some other countries were allowed in when they lied about their GDP etc to get entry.
his answer Italy would be poorer without being in, and theres the answer the poor countries want the GB and Germanys to leech off rather than sort out heir own mess
you can have free trade and movement of people without the EU, plenty of countries do it now
Poor Jo Cox, her constituency voted to leave:
Jo Cox, the Brexit Vote, and the Politics of Murder
If you want to get anywhere in politics now you have to go Identitarian. The people have had enough of rampant stupidity and globalism
The UK can become a fortress of freedom and broadcast its message to all of Europe. The Eastern European countries will be easy to sway. Russia will be an ally. Encouragement and assistance can be given to nationalist groups and parties working within Europe. The UK and the US should pull out of NATO. Work should start immediately on investigating whether it is possible to press charges against Cameron, Blair, Sarkozy and others for war crimes, waging wars of aggression and endangering Europe.
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