Guest Blog: Economy losing momentum, some exports on the up

Craigs_Investment_partners 300We’ve seen a string of indicators lately that point to a sharp slowdown in the economy, and there is now a lot of conjecture over whether our “rock star economy” is headed for recession.

I never liked that catch-phrase. It overestimated how good things were and set us up for disappointment when the inevitable slowdown came. But we’re probably getting a little too downbeat with talk of a looming recession and forgetting we’ve still got a few good things going for us.

Last week’s Quarterly Survey of Business Opinion (QSBO) was the latest negative indicator. The QSBO pointed to a net 7 per cent of firms being optimistic, well down from 20 per cent in the prior survey and the lowest reading since mid-2012.

The March GDP report was weaker than expected, with growth of 0.2 per cent well below the previous quarter and market expectations. The June ANZ business survey saw confidence slip into negative territory for the first time since the February 2011 Christchurch earthquake.

The key culprit to all this is falling dairy prices, so it is unsurprising the dairy-intensive regions have experienced the biggest dive in confidence.

Westpac’s latest regional survey saw the biggest falls in sentiment in Waikato, Taranaki, Canterbury and Southland. Confidence was highest in Bay of Plenty, Wellington, Nelson and Auckland, all of which have little dairy exposure. Canterbury remains buoyant, but sentiment is well down from previous highs.

Dairy products represent almost a quarter of our exports, so it would be foolish to underestimate the impact of the sharp decline in prices. However, there are still a number of positives as well.

Migration remains very strong, with the annual net inflow hitting a new high of 57,720 in June and May seeing the first net inflow from Australia since 1991.

This is the equivalent of population growth of about 1.2 per cent, which is a huge tailwind for activity in a small country like New Zealand, and particularly for Auckland.

We shouldn’t forget that we export other products as well, and many of these are doing quite well.

While global dairy prices have fallen more than 40 per cent over the past two years, prices for meat, wool, horticultural produce and seafood have all gone up by an average of about 5 per cent. If we account for the recent decline in the NZ dollar, the increase is more than 12 per cent over the same period. Tourism was already in very good shape, and will be seeing similar benefits from a lower currency.

We also have few levers to pull to soften the blow, something other countries don’t always have the luxury of.
We’ve seen one cut to the Official Cash Rate (OCR), and there are more to come. Whether it’s another one or another three depends on which economist you ask, but the trend is most certainly down.

The currency has fallen heavily, lessening the impact for dairy exporters and providing a nice boost to others.
The NZ dollar is down 10-20 per cent from its peaks against the US dollar, UK pound and the Australian dollar. Further weakness is certainly possible.

That particular double-edged sword comes with a few negatives, like the prospect of imported inflation as the price of fuel and other products could increase. However, at the macro level it is definitely a net positive.

We should worry about the dairy sector and acknowledge an economy that is quickly losing momentum, but we also shouldn’t ignore the things that are going right.

Mark Lister is Head of Private Wealth Research at Craigs Investment Partners. His disclosure statement is available free of charge under his profile on www.craigsip.com. This is general information only, for personalised investment advice please contact an Investment Adviser or phone 0800 272 442.

You may also be interested in this video: The slowing NZ economy – should we be worried?

This article was originally published in the New Zealand Herald on Monday 13 July 2015.