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Fears over a sharp economic slowdown in China sparked a widespread rout in financial markets. Oil prices have dropped 17% since the start of December 2015 to currently trading around US$35/barrel, after falling as low as US$26/barrel in mid-February. Global share markets are 7% lower since the start of 2016, after declining as much as 12%.
While the start of the year was decidedly rocky, financial markets have stabilised somewhat in the past couple of weeks. From an economic viewpoint however, the fundamentals look to be weakening further. The Organisation for Economic Cooperation and Development (OECD) recently revised down its estimates for global growth by 0.3 percentage points in 2016 and 2017 – taking growth forecasts down to 3% and 3.3% respectively. The OECD’s revision might not sound like much, but you have to go back to the height of the GFC to find a lower rate of global growth, and the slowdown is being driven by a marked downturn in world trade. This means that global demand will remain subdued – keeping inflation pressure low. Chinese economic growth is expected to slow to a pace of 6.2% in 2017 (based on OECD forecasts) - which remains a solid pace of expansion - but the downside risks to this outlook are mounting. Recent Chinese manufacturing data points to an on-going contraction in the sector and, combined with rising debt levels and a rapid expansion of credit, raises questions about the sustainability of the Chinese economy over the next five years.
New Zealand is a small open economy and that makes us vulnerable to the fates of our major trading partners. In particular, China and Australia are two of New Zealand’s major trading partners so if their economies slow, that can impact growth here. As a country we’re also increasingly reliant on the Chinese market for growth in our tourism and education sectors. The value of Chinese tourism to our economy is expected to overtake that from Australia within the next five years (note that this is value not number of tourists – Chinese visitors typically spend more per day and stay for longer).
For businesses, the start of this year was a reminder that nothing in this world is certain (except for death and taxes of course). Firms will always be exposed to a certain amount of volatility. Recent events serve as an important reminder to ‘hope for the best and prepare for the worst’, so maybe it’s time to have a think about ways to hedge your business exposures to sharp shifts in exchange rates and/or interest rates.
Economic growth in NZ has slowed over the past year on the back of on-going weakness in dairy prices and a slowdown in the Canterbury-led construction boom. However, recent data suggest that national building activity is once again on the up. The difference this time is that the centre of activity has shifted north – specifically to Auckland. Official data for the December 2015 quarter showed that the volume of all building work put in place grew 2.5% qoq and the level of construction work has surpassed the previous peak seen in 2005. There are several key developments that have supported a rise in building activity, including:
The combination of these factors led to rising building consents in late 2015. Building consents tend to be a good forward indicator of future construction.
Over 2015, 27,000 dwelling-related consents were issued – which was almost 10% higher than the previous year. The underlying growth has been predominantly in Auckland, and more recently surrounding regions such as the Waikato and Bay of Plenty have also experienced a rise in consents issued and construction activity. In contrast, consent issuance has pulled back in Canterbury following the peak in earthquake recovery-related building activity.
The construction story is not just about housing though. Consents data for non-residential construction also indicate a rise in activity in coming months. The volume of non-residential work put in place increased 2.3% in the final quarter of 2015. A supporting factor for non-residential construction in the coming years is a signalled increase in Government infrastructure investment in roading and public transport projects. In the Half-year Economic and Fiscal Update, the Government earmarked at least $5.5bn of investment spending over the next five years on state highways.. In addition the Minister of Finance, Bill English, has publicly commented that given the Government’s favourable fiscal position it has the room to increase spending further in the event that the global economy slows substantially – much of which would be ear marked for infrastructure spending. While the boost to the construction sector from the Canterbury rebuild is now well past its peak, the outlook for the sector remains positive over the next few years. This should directly benefit firms exposed to the construction industry but also have positive implications for retail sales of durables (such as furniture and whiteware) as well as areas that benefit from the increased infrastructure spend.
1 Banks may lend up to 5% of lending in this group to those with < 30% deposit but this will be very limited.
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