FYI | Feb 23 2009
By Andrew Nelson
New Zealand economic conditions continue to deteriorate, as does the outlook for the country’s top 12 major trading partners. While the future starts to brighten a little for the land of the long white cloud in 2010, this will ultimately be just as dependant upon the outlook for these 12 nations as it is on internal economics.
Economists are again beginning to reduce their economic growth forecasts, with Paul Brennan from Citigroup Global Markets now expecting the New Zealand economy to contract by just over 1% this year. Brennan thinks the risk is the downturn could be much worse. He notes the NZ economy has already contracted slightly during the first three quarters of 2008, with the new forecast now incorporating a further four quarters of falling GDP.
The top line numbers from Citi fit in with forecasts from ABN AMRO Morgans, who also has negative 1% plugged into its models. These forecasts are also in-line with Commonwealth Bank numbers out on Friday, which had the bank moving from minus 0.2% to minus 0.9%. However, the bank’s NZ Economist, Chris Tennent-Brown thinks there is some serious downside risk to even these reduced forecasts if the country’s major trading partners don’t pull out of the same rut.
Tennent-Brown notes the outlook for NZ’s 12 main trading partners, when factored together, has also been revised down substantially for 2009, to negative 0.9% from a negative 0.1%. Did you spot the similarity between these and the NZ outlook? And that’s just the beginning, notes Tennent-Brown, who thinks that these forecasts will very likely fall further given the pace of revisions has been unchecked for months. He thinks it not unlikely at all that a 2% contraction in trading partner growth in 2009 could occur.
The 2010 outlook is a little more upbeat and indicates a recovery might start taking place next year. The bank’s forecasts remain relatively untouched at 2.2%, but this is based on a working assumption of minus 0.8% for CY09, which is now pretty much in-line with consensus forecasts. But Tennent-Brown expects these numbers will also see further downward revisions and expects weak 1.2% growth for NZ’s major trading partners in 2010. Any further declines in consensus forecasts for this basket of 12 trading partners would imply at least the consideration of downgrading the already weak forecasts for New Zealand.
Citi also expects a muted recovery for New Zealand in 2010, with GDP growth of 1% over the year and growth of 2.2% by the end of 2010. However, notes Citi, the recovery is contingent on the global financial backdrop improving by late 2009, as New Zealand’s heavy reliance on foreign borrowing makes it vulnerable to the effects of global de-leveraging.
Sure, the New Zealand government has been busy in drawing up spending plans to buffer the economy against severe weakness like just about everyone else. In fact, fiscal stimulus this year is around 3% of GDP and the personal tax cuts, due 1 April, are worth over 1% of household income. However, points out Citi, the government is also facing a significant deterioration in tax revenues and this could limit its capacity to respond to the economic outlook given concerns over fiscal sustainability and agency ratings on government debt.
As such, the broker thinks the RBNZ is likely to reduce official interest rates further than it had previously expected and now thinks rates will reach a low of 1.75% by the June quarter. While this is already below the market consensus, Citi doesn’t rule out the RBNZ pursuing quantitative easing because official rate cuts so far have failed to gain much traction on lending rates.
Citi does expect import volumes to fall 8% in 2009 and this will somewhat cushion the impact on GDP of lower spending. But at the same time, a fall of almost 3% in export volumes this year is anticipated due to the deterioration in major export markets.
When coupled with the forecast for a 1% decline in consumer spending in 2009, the outlook again looks risky. Citi does note there will be some relief in the form of lower fuel prices, personal tax cuts and falling mortgage rates, but given household wealth has fallen considerably, the improved cash flows will likely be diverted to savings, or in the case of companies, to the restructuring of balance sheets.
On top of this, unemployment numbers are now at their highest levels since Q3 2002, which points to a sharp rise in the unemployment rate over the next 12-18 months, applying even more downside pressure to consumption forecasts and therefore, GDP forecasts.
