economics new zealand style

Dairy is to the New Zealand economy what iron ore is to Australia's.

AFTER September’s earthquake in Christchurch, New Zealand’s Prime Minister, John Key, and economists were quick to hail the positive impact rebuilding activity would have on economic growth.

This time is different. Lives have been lost. But it remains true that rebuilding efforts, which will be far larger this time around, could very likely be the factor that ultimately pulls New Zealand out of recession.

That is cold comfort indeed.

The land of the long white cloud has lived under the shadow of recession for nearly three years. Some analysts say the New Zealand economy is in a “triple dip” recession, experiencing three distinct periods of contraction: before the global financial crisis, during it and in the second half of last year.

New Zealand racked up its first quarter of “negative growth” – that is, the economy shrank – in the March quarter of 2008. Very high dairy prices had encouraged the country’s dairy farmers to binge on debt, going on a buying spree of neighbouring farms and property. But when global milk prices fell, they were left high and dry, trying to pay off their loans with dwindling revenue. House prices also suffered, tumbling about 10 per cent in 2008.

When the global financial crisis struck in late 2008, further depressing growth, New Zealand was hit again. With the country having been in recession since the start of the year, the government was quick to move with stimulus spending, which helped for some time to cushion growth.

However, towards the end of last year, growth faltered once again partly due to the September quake and partly due to a failure of private spending to make up for the withdrawal of public spending.

Economists at TD Securities tip the next growth figures will show the New Zealand economy contracted in the final six months of last year, meeting the “triple dip” recession criteria.

Making life harder for the Reserve Bank of New Zealand governor, Alan Bollard, are concerns that rising dairy prices will cause an inflation breakout. Dairy is to New Zealand what iron ore or coal is to Australia. Rising commodity prices mean more income sloshing around the economy and risks of rising consumer prices.

Indeed, within just a few hours of this week’s earthquake, New Zealand dairy processing company Fonterra – the world’s largest exporter of milk – announced an increased payout for dairy farmers. At a band of between $7.90 and $8 a kilogram of milk solids, it will most likely break the record payout for New Zealand farmers of $7.90 a kilo.

The RBNZ had begun lifting interest rates early last year in a bid to head off any inflationary pressure. After the earthquake, the central bank is likely to leave interest rates on hold. Speculation of interest rate cuts seems to be an overreaction, given the continued commodity boost to the economy. And then there is the impact of rebuilding from the quake.

We have more in common with our New Zealand brothers and sisters than you might have thought.


THE IRVINE INDEX 26/02/2011

15%
Portion of New Zealand economy represented by the Canterbury region including Christchurch.

15%
Western Australia’s share of the Australian economy.

$NZ16 billion
Speculated damages bill from the earthquake in Christchurch.

$NZ5 billion
Damages bill from the September quake, including $NZ1 billion to infrastructure, $NZ1 billion to commercial buildings and $NZ3 billion to houses and cars.

10%
Fall in New Zealand house prices in 2008. They have been fairly flat ever since.

$NZ1.35
What you can buy with one Australian dollar.

$NZ1.10
What you could buy with one Australian dollar four years ago.

6.8%
Jobless rate in New Zealand.

5.0%
Jobless rate in Australia.

4.0%
Inflation in consumer prices in New Zealand last year.

2.7%
Consumer price inflation in Australia last year.

Sources: stats.govt.nz, abs.gov.au, Citi Investment Research & Analysis, rbnz.govt.nz, TD Securities.

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2 Responses to economics new zealand style

  1. Stingray says:

    It’s no surprise. The party’s over and everyone knows it. Asset prices couldn’t keep rising! Australia has a serious debt problem that needs to be addressed. But at the moment it’s not even being acknowledged. Why not?

    Could it be that if we acknowledge the debt and the need to deal with it, we have to acknowledge its cause? And could it be that the cause is too unpalatable to reveal? Could it be that successive Australian governments, along with business, have been running a Ponzi scheme with our assets, our resources and our future?

    Consider this scenario…

    http://s4.zetaboards.com/Australian_Property/topic/8356472

    Unsustainable, yes?

    No government wants economic growth to slow. Slow growth undermines the short-term share price of big business (and CEO remuneration), as well as the electoral performance of the government. So to facilitate growth, the Government turns a blind eye to the fact that a significant proportion of demand fuelling “growth” is debt driven; debt-financed demand has constituted around 20% of total demand in the Australian economy.

    The best way to keep growth on the up and up is to keep everyone spending and money cheap. Consumers are told that spending is the right thing to do by businesses that profit from consumer expenditure and by governments who bask in the glory of booming growth figures. The availability of cheap credit and consumer binges drives up prices, so more debt is needed to keep the spending going. People feel wealthier as their house prices have gone up and they have more stuff. They think their house will fund their retirement, so they are happy to spend more and save less.

    Everyone is happy – particularly business and government – so long as the spending binge continues – and money can be found to keep servicing the mountains of debt being accumulated.

    And therein lies the rub. How is all this debt to be financed?

    Stingray.

    Australian Property Crash Forum

  2. Tanmedia says:

    According to the NZ Herald, banks (Asutralian owned of course) increased lending to Kiwi farmers from $19 billion to $47 billion over the past 7 years. Surely that has something to do with the rural property splurge. Some of the stories about the lack of due diligence of both the lenders and borrowers are quite incredulous.

    http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10704031

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