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In its October 2014 World Economic Outlook, the IMF stated that the world economy is in the middle of a balancing act:
“On the one hand, countries must address the legacies of the global financial crisis, ranging from debt overhangs to high unemployment. On the other, they face a cloudy future. Potential growth rates are being revised downward, and these worsened prospects are in turn affecting confidence, demand, and growth today.”
The IMF now projects world economic growth to be 3.3% in 2014 (down from 3.4% projected in July) and 3.8% in 2015 (down from 4.0% projected in July).
The “Emerging Market and Developing Economies” (which include China, India, Russia and Brazil) are projected to grow by 4.4% in 2014 and 5.0% in 2015, but the “Advanced Economies” (mainly the G7) are projected to grow by just 1.8% in 2014 and 2.3% in 2015.However, Euro Area growth is projected to be only 0.8% in 2014 (down from 1.1% projected in July) and 1.3% in 2015 (down from 1.5% projected in July).
Japanese growth is projected to be 0.9%in 2014 (sharply downwards from the 1.6% projected in July). And the projection is for only 0.8% growth in 2015 (down from the 1.0% projected in July).
The IMF appears sanguine about the New Zealand economy, which is expected to benefit from reconstruction spending and export recovery. New Zealand’s prospects are still good largely because of its trading ties with the relatively buoyant Chinese, Australian and other Asian economies.
In the Monetary Policy Statement released on 25 September, the Governor of the Reserve Bank, Graeme Wheeler commented that: commented that
“The exchange rate has yet to adjust materially to the lower commodity prices. Its current level remains unjustified and unsustainable”.
Explaining the recent strength of the NZ dollar, Mr Wheeler pointed to: i) strong commodity prices linked to China’s urbanisation and growing demand for protein; ii) the relative strength of the economy coupled with relatively high interest rates; and, iii) the efforts by central banks elsewhere to maintain liquidity in financial markets which have resulted in substantial portfolio inflows into New Zealand. Over the longer term, the persistent gap between savings and investment in New Zealand has meant that interest rates have needed to be higher than elsewhere to attract the savings of foreigners.
Mr Wheeler argued that the exchange was currently unjustifiable in light of the recent weakening in commodity prices. He pointed to research from elsewhere that suggested that the NZ dollar was up to 15% above its sustainable level. And he also pointed to several past episodes which suggested that there could be an initial depreciation, followed by a rapid downward correction.
The exchange rate fell in the immediate aftermath of the Statement. Immediately prior to the Statement, the Trade Weighted Index (TWI) was 78.2. Within three working days it had fallen to 75.8. It subsequently crept back up a little, but a month after the Statement it was at 76.2.
Likewise, the NZ dollar was trading at US$0.807 immediately before the Statement. Within three days, it had fallen to US$0.777. And a month after the Statement it was at US$0.782.
Announcing on 30 October that the Official Cash Rate (OCR) was unchanged at 3.5%, and hinting that it would stay there for some time, Mr Wheeler reiterated that the level of the New Zealand dollar was unjustified and unsustainable. He also stated that the Reserve Bank expected a further significant depreciation.
One of the main reasons why the OCR was left on hold and is likely to remain that way is that the rate of inflation is low.
In the year to September 2014, inflation, as measured by the Consumer Price Index, was 1%. This was down from 1.6% in the year to June 2014. Food price inflation in the year to September was -0.2%, i.e. average food prices fell fractionally. This was also down from 1.6% in the year to June 2014.
The Reserve Bank’s Policy Targets Agreement (PTA) it to keep inflation between 1% and 3% on average over the medium term, with a focus on keeping future average inflation near the 2% target midpoint.
In the year to June 2014, total weekly earnings in New Zealand, as measured by the Quarterly Employment Survey, increased by 2.7%. During the same period, all-sector salary and wage rates increased by 1.7%.
Meanwhile, the NZ Incomes Survey (NZIS) showed that median weekly incomes from all sources increased by 4.3% in the year to June 2014, and median weekly incomes from wages and salaries increased by 2.3%.
For most years at least since the NZIS started in 1997, growth in incomes has exceeded inflation. However, the opposite was true around the time of the Global Finical Crisis. Inflation was significantly greater than income growth between 2009 and 2011.
Income growth again exceeded inflation in 2012. And, since then, incomes have grown in real terms by almost 5%.
The Statistics New Zealand Tourism Satellite Account for the year to March 2014 showed that greater numbers of short-term visitors are coming to New Zealand, and that they are spending more while they are here.
Compared to the March 2013 year, the total number of visitors from overseas increased by 5.4% to 2.75 million, and their total spending increased by 7.4%, to $10.3 billion. By comparison, spending by domestic tourists increased by 3.2%, to $13.3 billion.
The number of visitors from Asia increased by 8.8%, and the number of visitors from The Americas increased by 8.0%.
About half of all visitors are in New Zealand on holiday/vacation. Their number increased by 8.3%, having fallen by 1.4% the previous year. Only 1 in 50 visitors is here to attend a conference/convention, but their number increased by 6.9%, following a 6.7% increase in the year to March 2013.
In the year ended September 2014, the number of permanent and long-term arrivals into New Zealand was 105,468. The number of permanent and long-term departures was 60,054.
The net migration figure of 45,400 was the highest on record. Until August 2014, when net migration was 43,500, the previous high was 42,500 in the year to May 2003. Over the past 20 years, annual net migration has averaged 11,700.
At a time when weakening commodity prices and global economic uncertainty threaten to impact heavily on the New Zealand, strong net migration will have the effect of sustaining domestic economic growth.
The number of permanent and long-term arrivals was also a record, and the number was up by 16% from a year earlier. The number of permanent and long-term departures has been lower on several previous occasions. However, it was down 21% from a year earlier and it was lower than at any time since March 2004.
In the year to September, the number of net migrants, by country of origin, was:
Despite record net migration, New Zealand is still experiencing a net loss of people to Australia. In the year to September 2014, the net loss was 6,000. However, this was well down on the net losses of 25,300 in the year to September 2013 and 39,500 in the year to September 2012.
The latest figure is the lowest since the year to December 1994, when a net 5,900 people left for Australia.
While every effort is made to ensure that the information, opinions and forecasts included in this publication are accurate and reliable, BERL and all contributors do not accept responsibility for any errors or omissions, or for any loss or damage resulting from reliance on or the use of information, forecasts or opinions it contains.
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