Headline article from the BNZ Weekly Overview of December 5.
Overseas Influences On Our Economy
Due to Summer tramping this week’s WO has been shortened and sent early.
We enter 2003 in a continuing state of uncertainty about how our largely robust domestic economy will be buffeted or boosted by events offshore. Three key routes by which develops offshore influence us are canvassed here.
Trading partner economic growth
- Exchange rate movements
- Migration Flows
There are of course many other ways in which we are affected by events offshore including foreign direct investment, trade barrier alterations, and so on. But these three will suffice.
Trading Partner Economic Growth
If everything goes as the foreign forecasters currently think then the recent rises in prices for some of our export commodities should continue. The ANZ Commodity Price Index in world price terms for instance has risen by 5% from its low back in August and now sits 0.6% up from a year earlier. As the graph just below shows there is a reasonable correlation between changes in the rate of growth in our top 14 trading partners and changes in our commodity prices.
For 2003 our trading partners are expected to experience growth of 3% compared with 2.6% this year and 1.4% over 2001. However in recent months the 2003 forecast has been slashed from 3.7% and at 3% the latest pick is still below the long term average growth rate of 3.5%.
Thankfully some of the data emerging in the US economy in recent weeks have been better than expected so maybe we are near the end of the downward revisions to trading partner growth. But there remains the lingering uncertainty about how terrorism may affect growth and perhaps of greater relevance the chances of war in Iraq and how oil prices may be affected.
All one can do in an environment where an identified risk exists but one does not know whether or to what extent it will occur is exercise caution while continuing with long term plans hoping for the best but being ready to react to the worst. That is what appears to be happening in New Zealand. Businesses are saying they know they need to boost capital expenditure and say they will do it. The NBNZ Business Outlook Survey showed that in spite of net zero confidence compared with a long run average of +25%, intentions of investment in plant and machinery were +18% and right on the long term average. But there is no evidence yet that investment is happening to any strong degree. Recent imports data give some cause for hope with the value of capital goods imports in October being 7.6% ahead of a year earlier after a 13.1% rise in September. But these data can be quite volatile and were unusually weak at this time last year anyway.
Exchange Rate Movements
And it is of course not just the rate of growth in our trading partners and the risk of bad events offshore which directly affect our economy. There is the exchange rate influence as our currency adjusts to reflect perceived differences between our fortunes and those overseas. Over the past year on a trade weighted basis the NZD has risen by around 15% driven up by
- attractive interest rate
- good growth differentials,
- a low current account deficit, and
- recovery from an undervalued position.
Recently the NZD traded over 89 cents against the Australian dollar and the evidence suggests this rise is negatively affecting the export hopes of manufacturers. Manufacturing export expectations measured in the NBNZ survey fell to just 34% in November from a recent high of 45% in May, and a long term average of 46%.
Clearly our tradeables sector faces some troubling times. And this is before we start talking about the extent to which farmers will pull back from their recent one in twenty year capital and durables expenditure splurge. The anecdotal feedback we have been receiving suggests that so far in spite of the hits from weak NZD denominated returns in some sectors and unhelpful weather farmers are only pulling back slightly in their spending rather than slamming their wallets shut.
Finally there is the other big way in which the rest of the world can grossly affect our economy – migration flows. In the year to October the net flow was a record gain of 37,450 people. To date the net inflow in this cycle since June last year of 48,260 people is less than the 101,491 gain between mid-1992 and early 1998. But the speed of the gain is much greater and this manifests itself as more rapid pressure on housing availability.
Over the coming year we expect migration flows to produce another large net population gain, but recent rule changes and improving growth prospects offshore are likely to combine to produce a fall in the net inflow to something below 30,000. Frankly that is enough in our opinion to maintain the heat in the housing market, and in doing so risk staying the hand of the Reserve Bank from easing monetary policy and therefore reinforce the upward pressure on the exchange rate.
The past year has been one in which domestic growth has dominated the economy and the same is likely for 2003. Export growth will be constrained by the rising currency and below trend trading partner growth. But one part of domestic activity will receive a continued (though less strong) boost from migration flows – housing, while another – business investment – unfortunately looks likely to grow less rapidly than the capacity pressures of the economy would suggest is optimal.