Oh no, not again!

The New Zealand economy remains, at best, in a ‘holding pattern’. At worst, it could be on the edge of ‘yet another double-dip’ (or is that a triple-dip?) recession.

The ‘holding pattern’ scenario arises from;

• ongoing uncertainty arising from influences surrounding the European and US financial sectors,
• renewed concern that economic growth in China and Australia may be running out of steam,
• little confidence that there is a sustained upturn in economic activity waiting around the corner.

The ‘yet another double-dip’ scenario gets its credentials from;

• evidence of stalling export revenue, and the expected continuation of an overvalued exchange rate,
• little expansion in credit supply as the banking sector restores its collective balance sheet,
• the New Zealand government budget undershooting revenue targets,
• a growing migration exodus of New Zealand residents,
• further frustrating delays in the rebuild of Christchurch.

If one believes in the ‘holding pattern’ scenario, then the exit or upturn will occur when there are clear indications of exchange rate or credit supply relief; fiscal policy easing; or a clear, decisive and sustainable end-game to global financial uncertainty.

Monetary and fiscal policy, however, is likely to move towards tightening, and the only uncertainty exists around timing. Further, despite the latest calm descending on the financial markets, few believe that the underlying imbalances and problems have been successfully acknowledged or rectified.

Consequently, businesses are adopting a ‘no change’ or ‘wait and see’ approach when it comes to hiring and/or investment spending.

‘Yet another double-dip’ believers see the tapering growth in export receipts for dairy products and logs as taking away the one leg that the recovery scenario was left standing on. The other leg, the Christchurch re-build, remains in place but has not yet warmed up for action.

Further inspection therefore suggests that there may be a third scenario – a two-speed economy. This scenario has growing contrasts between:

• The regional impact of a stuttering export performance and delays in the Christchurch re-build.
• Signs of a recovery in Auckland based on resurgent housing and retail sales.

Regional economies that directly depend on the health of the export sector are struggling at the same time as the Auckland housing market is showing significant signs of overheating, with rising rents reflecting a shortage of housing units.

The overvalued New Zealand dollar has also undermined tourism activity to the extent that foreign exchange receipts from tourists have fallen for four consecutive years. This takes our number two export earner to an annual total that is 18 percent below it’s 2007 level.

The third scenario with a two-speed economy sees headline GDP grow - with employment and retail spend looking modest - but the reality would be much more complex. The policy picture here could be further clouded by renewed oil price inflation from abroad, which would add to the Reserve Bank’s conundrum as to when and/or whether to move on interest rates.

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External sector positive, but only just

• Annual trade balance for the year to January registered surplus of $646 million.
• Terms of trade lower as export prices rise less than import prices.
• Imports of capital equipment increasing, which may be sign of improving confidence.

Our annual trade balance is in surplus to the tune of about $646 million. This is good news as a trade surplus is good for the economy. But the makeup of that trade surplus is important in assessing the prospects of the performance of the external sector.

In particular, the December 2011 quarter saw export receipts up 8 percent compared to the same period last year. However, growth in export receipts for some of our key exports – such as forestry products – have started to ease as demand from our main markets, China and Australia, comes off the boil.

Thus, the surplus to January this year was about $264 million less than our surplus in the previous year to January 2011.

A further reflection of this easing is found in our terms of trade. The prices we received for our exports rose less than the prices we paid for our imports. Thus, our terms of trade have declined. While still high in a historical sense, further falls in our terms of trade will negatively impact on the trade balance, the overall external current account balance, and slow income growth for many regional areas around New Zealand.

In the December 2011 quarter forestry export receipts fell 6.5 percent compared to year-earlier levels. Although still about a billion dollars, these receipts have been declining since June 2011.

In terms of our log export markets, China and Russia have decreased the amount of softwood logs and lumber they import from New Zealand. But overall, in the year to January 2012, log export volumes were up 18.3 percent compared to the year to January 2011. This is the equivalent to a two million cubic metre increase, from last year’s total log exports of 10.7 million cubic metres, which indicates that while the price we receive for our logs is declining, we continue to export large amounts of these commodities.

Import volumes for the December 2011 quarter were up, but at a slower rate compared to previous quarterly increases. The importation of mechanical machinery led the way, along with small rises in the volume of electrical machinery.

In the year to January 2012, the value of capital imports (in particular plant equipment) increased 21 percent compared to the same period in 2011. Note that as capital import spending reflects business investment. Consequently, year-on-year increases in capital import spending may be an early sign of enhanced business confidence. However, it is clear that this spending remains well below the level of spending in earlier years.

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Meat volumes down, international prices up

• Beef and Lamb New Zealand expect better meat export volumes.
• Imports volumes annual average index
• Low global meat supplies expected to keep prices up.
• New Zealand meat volumes currently low, due to reduced stock numbers and slaughtering.

Keeping with the external sector theme, Beef and Lamb New Zealand released their mid-season update in February. They expect a small lift in meat export volumes in 2012, and that prices will remain high.

The supply of meat into the international market is currently low. This is because large producers such as the United States have had droughts. In the US, their stock levels are at their lowest point since 1952, and there is a shortage of mutton in particular.

However, Beef and Lamb New Zealand stressed that the strength of the New Zealand dollar may erode some of the benefits of strong international prices. In turn, we would stress that declining stock numbers and a decrease in slaughtering will also impact on our ability to capitalise on these high international prices.

In the year to January 2012, meat volumes were down seven percent on year-earlier levels. During this period there was a 5.4 percent decline in the number of cattle being slaughtered and a 3.8 percent decline in sheep slaughtering. These declines may be due to farmers holding back stock due to good pastoral growing conditions. But meat volumes in general have been declining for some time now.

With stock numbers and slaughtering down, the beef sector may need to concentrate on increasing weights to increase export receipts.

As shown in the figure, there has been a substantial decline in the average beef carcass weights. In contrast the average carcass weight for lambs has steadily increased. With our current season of good pastoral growth, sheep farmers are also hopefully concentrating on increasing stock weights, and fattening up their stock to take advantage of the tight international supply of mutton.

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Manufacturing still playing catch up

• Manufacturing activity still catching up on lost ground.
• Excluding dairy and meat processing, manufacturing sales down 0.7 percent in the December 2011 quarter.
• Business confidence remains concerned with markets and the exchange rate.

In the December 2011 quarter, manufacturing activity was up just 2.3 percent compared to the previous quarter. This growth was due to an increase in sales volumes of dairy and meat products. If we exclude dairy and meat, annual manufacturing sales volumes were up by only 0.3 percent. Moreover, if we compare quarter on quarter sales figures, and exclude dairy and meat processing, manufacturing activity fell 0.7 percent.

Manufacturing activity has not quite caught up on lost ground as yet. Substantial declines have occurred in sectors such as textiles, metal products, paper manufacturing and furniture. As shown in the figure, activity in these sectors is still well below the levels of those three years ago.

The surveys that we monitor indicate that production and new orders are up in the manufacturing sector, but business confidence remains concerned with markets and the exchange rate.

Australia remains our closest and largest trading partner. The year to January 2012 saw the value of exports to Australia reach $10.9 billion, an increase of 8.5 percent on the previous year.

Furthermore, despite an inevitable easing in growth, the Australian economy is expected to continue expand throughout 2012. Australian GDP grew 0.4 percent in the December 2011 quarter, after a 0.8 percent rise in the September quarter. Australian annual GDP growth is expected to average 3 percent, on the back of continued demand for commodities from China.

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Skills lost as migration exodus grows

• Greener grass still attracting New Zealand residents across the Tasman.
• In 2011, 48,829 New Zealand residents departed for Australia.
• This is the highest figure recorded in our database, which goes back to 1979.

Emigration is still continuing at record levels with the main target destination Australia – as usual.

Total resident departures were 86,000 in the 2011 calendar year. In this same calendar year, 48,829 New Zealand residents departed for Australia. This is the highest figure recorded in our database, which goes back to 1979. Over these 32 years, the earlier peaks in resident departures to Australia were 2008: 47,166; 2001: 39,848; 1988: 43,595 and 1979: 46,035.

On average, departures per year are now over 30,000 people. This indicates that the present outflow of New Zealand residents is about 60 percent above average. More concerning though, is that this situation does not look like it's improving any time soon, particularly as the emigration destinations are not just limited to Australia.

New Zealand is losing important skills. BERL has analysed the occupations of people who are emigrating and compared this with the number of people in these occupations. This research shows that in the last two years, the emigration of skilled residents has been a significant share of the skilled workforce in a number of key occupations. For example:

Architects, planners

6.4%

Engineers

8.6%

School teachers

5%

Health therapy and GPs

11%

Carpenters etc

16.2%

Plumbers and electricians

4.5%

Hospitality and travel service workers

8%

These are important skills that the New Zealand economy is losing. This further reinforces the concerns that we raised earlier, that New Zealand may be heading towards a ‘holding pattern’ or ‘yet another dip’ scenario in 2012 rather than an export-led growth scenario.

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