Business Matters

NZ dollar stays close to post-float highs

• NZ dollar continues in favour.
• Quantitative easing around globe seen as cause for high NZ dollar.
• Few signs of RBNZ intention to intervene.

The New Zealand dollar has risen significantly over the past two years. In January 2013, the NZ$ averaged 84 US cents and over 75 on the Trade-Weighted Index (TWI) basket of five currencies, close to its post-1985 float highs.

The Reserve Bank of New Zealand (RBNZ), the International Monetary Fund, and the OECD have all stated that the New Zealand currency is overvalued. A primary driver of this over valuation is seen to be quantitative easing being engaged by many authorities around the globe.

The US and Europe have been undertaking quantitative easing to encourage investment and stimulate their economies. These countries have also kept interest rates at close to zero, sending currency investors to New Zealand where interest rate returns are much higher – for example, the 10 year bond rate is currently above three percent. This unfortunately has an adverse effect for New Zealand in terms of pushing up the value of our currency and so damaging the fortunes of the export sector.

New Zealand is not the only country with a large appreciation in its currency. Over the past year the Swiss Franc has come under immense pressure from investors searching for a safe haven from the troubles in the Eurozone. This has led the Swiss National Bank to enforce a ceiling on its currency against the euro to tackle its soaring value.

This drastic move has raised questions as to whether New Zealand will cap the NZ dollar. The Reserve Bank is refraining from targeting the exchange rate.

Thus, the New Zealand economic strategy concentrates on bringing the government’s deficit down (and its borrowing), and to getting more momentum in the economy through the Christchurch rebuild.

A key vulnerability for New Zealand continues to be the high level of household and external debt.

Although the growth of household debt has slowed since 2007, it is remains high. Household debt as a ratio of household disposable income is 143 percent at September 2012.

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Producer costs and prices on the decline

• Lower electricity prices lead fall in production costs.
• Input costs for manufactures also fall.
• However, prices for manufacturing goods and services also declined

Over 2012, producers paid less for inputs used in production but also received less for the outputs they produced.

The input producer price index (PPI), representing the prices of goods and services used by New Zealand producers, fell half a percent. This is the first annual decline since December 2009. The main decline came from the electricity, gas and water; manufacturing; and information media industries.

Electricity prices have declined due to greater hydro-storage conditions. Manufacturing (including food processing) costs have been dropping since mid-year, with the latest decline mainly coming from lower lamb and sheep prices, and lower wool prices.

Input prices in other industries have increased. Most input prices rose modestly, by less than two percent, with the largest increase from the rental and hire industry.

Output prices, representing the prices of goods and services received by New Zealand producers, have also fallen – on average by nearly 1 percent over the past year. Prices for the agriculture, forestry and fishery; mining; and manufacturing products reported the largest price declines.

The main driver for price declines in the agriculture, forestry and fishery industry came from dairy cattle farming which reflects the lower milk prices received over 2012. For dairy farming, this is the sixth consecutive fall in the dairy farming output price index since September 2011.

The decline in manufacturing output prices was mainly due to a decline in meat processing prices, down 12 percent, the largest decline since December 2009.

With producer input and output prices trending downwards, deflationary pressures are becoming a concern. Further, with the output prices now falling faster than input prices, producers’ margins are being squeezed. A deflationary environment along with margins under increasing pressure is a recipe for further weakness in business profitability and economic activity.

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Is New Zealand losing its charm?

• Visitor numbers down on year earlier, but Rugby World cup helps explain some of decline.
• Fewer people visiting from our traditional markets, Australia, UK and France
• Guest nights numbers show similar declines.

In 2012, there were 36,000 fewer visitors to New Zealand compared to 2011. Annual total visitors were more than 1 percent to 2.56 million. While the Rugby World Cup in 2011 explains some of this declined, the chart indicates that the industry has struggled over the past few years.

Over 2012 there was a noticeable decline in tourists who came for vacations, or to visit friends and relatives. In addition, there was a 2,400 reduction in visitors who came for conventions and conferences.

In addition, short-term education arrivals were down by about 7 percent compared to 2010 and 2011. Noting that about 17 percent of the nation’s export services revenues come from export education, this reduction is also concerning.

The number from traditional markets such Australia, United Kingdom and France were also down, with 62,000 fewer holiday and vacation visitors from these areas.

Due to fewer travellers from overseas, it is also not surprising to see international guest night numbers decline. Foreign visitor guest nights for the year fell across all regions, except for Auckland. The national trend for international guest nights has been declining since December 2009.

A number of factors explain the decline in tourism activity in the country. Slow economic growth in New Zealand’s traditional markets is certainly a factor. In addition, the strength of the NZ$ reduces visitors’ purchasing power once they get here. This consequently leads to lower growth rates in spending and guest night numbers. Statistics New Zealand’s data suggests that the average expenditure per visitor is $100 less than a year earlier. This translates to about $117 million less spending in the domestic economy.

Tourism and export education industries are critical to New Zealand’s export revenue earnings, as well as employment prospects. Needless to say, these indicators will continue to be monitored closely.

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Mixed signals from manufacturing

• Latest PMI index suggests manufacturing is back in expansion mode.
• Employment data indicates job losses in manufacturing are mounting.
• Economic conditions among our trading partners remain fragile.

The Performance of Manufacturing Index (PMI) stood at a seasonally-adjusted 55.2 in January 2013, indicating that manufacturing activity is expanding. Data from this BNZ- Business New Zealand survey shows an improvement in manufacturing from both December and November. Further, this result is above that seen in January 2012 (51.0), January 2011 (53.4), and January 2010 (53.6).

Four of the five indices that make-up the PMI were above 50 in January, with the highest being production sitting at 57.7, followed by deliveries at 57.6. In regards to three-monthly averages, the PMI stood at 52.5 in the three months to January, with production, employment and new orders all sitting just above the benchmark 50 level.

At a regional level, year-on-year improvements can be seen in the Canterbury, Northern and Central regions. But these improvements need to be considered within the appropriate context. In January 2012, the Northern and Central regions were experiencing a noticeable contraction in manufacturing activity, so any improvement in output or new orders is off a low base.

Despite these indications of growth in manufacturing, employment statistics from Statistics New Zealand’s Household Labour Force Survey tell a different story. Since December 2011, employment in manufacturing declined by nearly 17,000, or close to 7 percent.

Over 2012, the main decline in New Zealand’s manufacturing employment is from a decline in food product processing. This sector includes jobs at meat and dairy processing plants, as well as other food product manufacturing establishments

There was an 8,500 reduction in jobs in this industry over the past year, equivalent to a fall of nearly 11 percent. There were also job losses in textile, leather, clothing and footwear related businesses (of 3,200 down) and fabricated metal product manufacturing (of 2,800 down).

Although there is usually churn within manufacturing, these job losses are significant for a recovering economy. However, manufacturing employment has been on the decline for more than a decade as a result of several factors.

Amongst these factors are increasing outsourcing, as globalisation and the development of international supply chain become dominant. In addition, labour costs in developing countries mean many labour-intensive activities are unlikely to be competitive in New Zealand. Further, both the level and uncertainty of the NZ$ exchange rate can also make investment in manufacturing capacity in New Zealand relatively unattractive.

Globally, economic conditions among our trading partners remain fragile. Economic activity in the Euro area is contracting and there are signs that growth in Asia is slowing. The prospects for manufacturing look challenging, to say the least.

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