BNZ economist upbeat on economic prospects

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Strong fundamentals in New Zealand’s economy mean despite any uncertainty generated by the election, prospects remain promising for growth rates that would still be the envy of many developed nations around the world.

BNZ’s head economist Doug Steel had an upbeat view of the economic landscape over the coming season for agri-business professionals and farmers at this year’s KPMG agri-business seminar.

His outlook came as the government started to reveal its varied policy plans for the economy.

Much of that upbeat view was also being driven by the engine room of provinces including Waikato and Bay of Plenty as primary products, with the exception of wool, all record values higher than they have been in five years. Wool continues to be the commodity under-performer, being down 30 percent on its five year average.

BNZ head economist
Doug Steel.

Acknowledging the uncertainty that inevitably followed the election of a new coalition party, Steel said there were some swings and roundabouts within the policy announcements to follow the new government.

Net migration was likely to drop from its peak of 70,000 last year to nearer 40,000 a year, and the tax cuts scheduled for April were also gone.

However in their place there was the prospect of the first year of tertiary education being free, greater impetus on house construction and a $1 billion focus on specific regional development projects.

All up an additional $7 billion of fiscal expenditure would be borrowed over the next four years.

The one area not factored as strongly into market valuations had been the fact the Kiwi dollar was 5 percent lower than the Reserve Bank had estimated it would be in the post-election environment.
“And that will be much upon its mind when setting the next round of interest rates, which may lift sooner than we thought,” he said.

These may come towards the end of next year, rather than 2020.

Steel was asked to comment on Winston Peters’ dark outlook for the economy in months ahead, and maintained that while economic growth may drop below 3 percent, it would still be healthy.

GDP growth this year has been 2.5 percent, compared with a 10 year average of 1.9 percent and the economy continued to deliver benchmark figures “other economies would kill for” said Steel.

Very strong figures across the primary sector were doing much to buoy these numbers, with horticulture, dairy, beef and sheep meat all looking at returns higher than they have been for five years.

However given Waikato’s reliance upon dairy returns, Steel was cautious about how attainable Fonterra’s $6.70/kg milk solids (MS) forecast would be for this season. Butter prices were likely to slip back off their record high prices, and skim milk powder (SMP) faced a 400,000 tonne stockpile in the European Union that was going to have to be moved sooner than later. Meantime Whole Milk Powder (WMP) faced reasonable demand from Chinese buyers.

“But we think the estimate of $6.75/kg MS is looking a bit optimistic, with WMP dipping, butter easing and SMP also staying soft.”

BNZ’s estimate are for milk solids to sit nearer $6.40/kg MS, but Steel qualified that by pointing to tighter milk supplies out of NZ being likely given the run of wet weather this spring.

“But it is still better than $6.12/kg MS and way better than $3.90/kg MS.”

The biggest surprise from the election had been its impact upon the Kiwi dollar, falling to be 5 percent lower than the Reserve Bank had anticipated. This may feed through to put pressure on lifting interest rates sooner than later.

“We think with the currency lower and inflation slightly higher and greater fiscal spend it is likely interest rates will move up towards the end of next year.”

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