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Tradables distress heightened by currency carousel

Business and Economic
Research Limited

“Tradable sector distress further heightened by currency carousel”, say BERL forecasters

BERL’s latest quarterly assessment of prospects for the New Zealand economy revolves around:

“… heightened concern for the distress exhibited in the tradable sector, with the recovering world economy - yet again - offering a lifeline”.

“Events over the past few days since the finalisation of our forecast only serves to reinforce our view that NZ’s latest ride on the exchange rate carousel is damaging our long-term growth prospects”, commented BERL Forecasts Editor Dr Ganesh Nana.

Tradable sector distress is best reflected in the bleak outlook for forestry exports. The combined impacts of unfavourable world prices, a volatile exchange rate and the electricity price shock have left this industry floundering. A slight recovery in dairy receipts, coupled with struggling meat returns and a ‘flat’ profile for aluminium, horticulture, fish and - the bellwether manufacturing category - machinery and transport equipment along with tourism ‘holding the line’, result in a BoP deficit of $7.6bn in the June 2004 year.

The eventual ‘middle-muddle’ scenario rests on momentum in the domestic economy from existing migrant flows, tourism activities and pockets of regional development initiatives (with associated foreign skills recruitment). The trough in overall activity occurs in mid-to-late-2004 before the remnants of the tradable sector return for yet another ride on the exchange rate carousel.

Arguments in the RBNZ’s latest Monetary Policy Statement suggests that, as with the mid-1990s, high house price growth will dissuade reduced interest rates or NZ$. “While the RB will no doubt continue ‘jawboning’ down house price expectations, similarly aggressive action to jawbone exchange rate expectations to an explicitly stated competitive level is equally necessary, as is unambiguous support for less volatile exchange rate movements”, concluded Dr Nana.


THE PICTURE

September 2003

Our view now revolves around heightened concern for the distress exhibited in the tradable sector, with the recovering world economy - yet again - offering a lifeline. Migration is the key driver of the economy right now. However it seems to be at a potentially unstable turning-point giving three potential scenarios.

One sees a return to tradable sector strength along with a strong 30,000 annual net migration inflow, another sees both the education industry and the tradable sector turn to custard along with a minimal 5 to 10,000 pa migrant inflow. The ‘middle muddle,’ scenario sees the education industry faltering and a weak tradable sector.

Our forecast is for the eventual outcome to be similar to the middle-muddle scenario. However, momentum in the domestic economy from existing migrant flows, tourism activities and pockets of regional development initiatives (with associated foreign skills recruitment) mean the trough will not occur till late-2004. Moderately buoyant growth in the latter portion of the forecast horizon hinges on the stabilisation of current migration and education ‘issues’ and the remnants of the tradable sector returning for yet another ride on the exchange rate carousel.

GDP growth eases to average 2.3% in the year to March 2004 - dominated by a negative 1.4% contribution from the net external trade sector. Activity growth remains soft in mid-to-late 2004 before picking up to reach 2.9% in the March 2005 year and 3.3% in the following March year.

Tradable sector distress is best reflected in the bleak outlook for forestry exports. The combined impacts of unfavourable world prices, an uncompetitive exchange rate and the electricity price shock have left this industry floundering. A slight recovery in dairy receipts, coupled with struggling meat returns and a ‘flat’ profile for aluminium, horticulture, fish and - the bellwether manufacturing category - machinery and transport equipment result in a BoP deficit of $7.6bn.

As in previous episodes when such a magnitude has been reached (5.7% of GDP), the need to finance such a deficit will see NZ small businesses again be susceptible to the whims of a somewhat more recalcitrant banking sector. Scrutiny of loan facilities for businesses will become increasingly stringent and provide little incentive to think much beyond the short term.

In line with our forecasts three months ago, we expect the Kiwi to ease further as the Greenback recovers lost ground against the Euro - with the Kiwi heading closer to US$0.55 and A$0.85 over the coming 12 months.


ENDS

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