FYI | Aug 09 2007
By Chris Shaw
The New Zealand economy continues to post solid growth despite high levels of official interest rates, but the good news according to Macquarie Equities is this solid growth should continue in coming years.
The broker’s view is based on a positive outlook for soft commodity prices, which are important for the Kiwi economy as dairy, meat and forestry products make up 40% of its total nominal exports.
Of the three dairy has been the outstanding performer, having risen 7.8% month-on-month in July to be up more than 110% year-on-year. In the same period global forestry prices have increased by around 17%, though the broker notes the impact of this for New Zealand has been largely offset by its strengthening currency.
The beef and lamb sectors in contrast have found the going much tougher, as the small increases in prices in recent months have been more than offset by currency appreciation.
The broker sees scope for further price improvements in this sector though as lamb prices should climb thanks to a combination of lower Australian output as herds are rebuilt following the drought and falling global production on the back of EU subsidies. Forestry prices are also expected to push higher as supply falls following a decision by major exporter Russia to increase its export taxes.
Dairy prices on the other hand are tipped to correct from recent highs but the broker expects prices will continue at relatively high levels for some time. This should produce solid returns for several more years, assuming the New Zealand dollar depreciates somewhat from current levels.
The high prices are attracting more farmers to the dairy market and this should show up in both higher output and higher incomes levels for the farmers themselves, the combination suggesting overall GDP growth will continue to be solid.
