ECONOMIC UPDATE

Nick Clark
7 April 2017

The export outlook for primary industries has improved according to the Ministry for Primary Industries’ March quarter Situation and Outlook for Primary Industries (SOPI).  For the year ended June 2017, primary sector exports will be $37.5 billion, up $800 million on December’s forecast.  

This means that compared to the year ended June 2016, primary sector exports for the year ended June 2017 will be up $500 million rather than be down $300 million as earlier forecast.

The report observed that dairy export volumes were much stronger over the December quarter than MPI had previously forecast.   Stronger global prices for forestry and dairy products, combined with rising horticulture production volumes, more than offset falling beef and lamb exports due to lower stock numbers.

Looking ahead to the year to June 2018, primary sector exports are expected to increase a further $3.6 billion to $41.1 billion (up 9.7 percent on 2017).  Dairy is expected to be a major contributor to the increase (up $2.3 billion) but meat and wool should also post an increase (up $340 million).

Although 2016 wasn’t a great year for many sheep and beef farmers, the monthly ANZ Commodity Price Index showed a welcome boost for their products in March.  Overall, the Index in world prices was up 0.4 percent, with a 3.8 percent increase for meat and fibre outweighing a 1.8 percent fall for dairy.  Wool (up 8.6 percent), lamb (up 5.8 percent) and beef (up 1.9 percent) all posted healthy gains with only skins falling (down 1.8 percent).

With the NZ Dollar depreciating by 2.9 percent in March, the NZ Dollar Index (which better reflects farmgate prices) was up 3.4 percent.  The increase for meat and wool was boosted to 6.5 percent when adjusted into NZ Dollars.

Dairy prices increased 1.6 percent in this week’s Global Dairy Trade auction.  Whole milk powder was up 2.4 percent but other commodities were mixed with skim milk powder down 0.8 percent.  Overall the average selling price was $US3,005 and 22,642 tonnes of product was sold.  

The GDT has been choppy so far this year and the GDT Price Index is down almost 9 percent on its peak in early December.  However, it is still up 54 percent on the same time last year.

Agricultural debt was down slightly in the month of February, according to the Reserve Bank’s revamped Sector Credit Statistics.  At $59.3 billion, agricultural debt was down $53 million (or 0.1 percent) on January’s level.  

The rate of growth in agricultural debt for the year to February 2017 was 3.5 percent.  After peaking at 9.3 percent in September 2015, the annual growth rate has steadily slipped almost every month since then.  

Business confidence eased a bit in March, according to ANZ’s monthly Business Outlook Survey, but businesses still feel good about their own prospects.  

Overall, a net 11.3 percent of businesses expect the economy to improve over the coming year, down 5 points on February.  However, a net 38.8 percent expect their own business activity to increase, up 2 points.

Agriculture’s sentiment turned negative again in March with a net 7.9 percent expecting the economy to worsen over the coming year, down 3 points on February.  However, while gloomier about the general economy, farmers still feel positive about their own businesses with a net 35.0 percent expecting their activity to increase, up 9 points on February.

Although businesses and especially farmers don’t feel as chirpy about the economy as a whole, collectively their views about their own activity would indicate a continuation of respectable GDP growth.

It was a very similar story in NZIER’s Quarterly Survey of Business Opinion, which found an easing of business confidence in the first quarter of 2017.  A net 16 percent of respondents were optimistic about the economy, down 10 points on January. Building continues to be the most positive sector.

The decrease in confidence comes despite businesses reporting their own activity holding firm and increasing capacity constraints.  NZIER believes that economic growth should remain solid over the coming months at around 3 percent.

Unlike the ANZ survey, the NZIER survey does not include agricultural respondents.

Finally, the Government’s Financial Statements for the eight months to February 2017 showed an operating balance before gains and losses of $1.4 billion, $912 million better than forecast in last December’s half-year economic and fiscal update.  Net core Crown debt is also $865 million lower than expected.

The larger than expected surplus is due mainly to core Crown tax revenue being $462 million higher than forecast and core Crown expenses $395 million lower than expected.  Partly the latter is due to unrealised costs in relation to the Hurunui-Kaikoura earthquake, costs which remain uncertain.

These results are payback for eight years of fiscal responsibility and they now provide choices that will be the envy of most developed economies. The bigger than expected surplus will no doubt increase the clamour for more spending, making the Labour-Greens commitment to adhering to Budget Responsibility Rules very timely.  But with the tax take growing so are the calls for tax cuts, especially with it being several years since we last had any.   All eyes will turn to the Budget on 25 May.


Exchange Rates
NZ Dollar versus    
This Week  
(6/4/17)
 Last Week 
(30/3/17)
 Last Month    
(30/3/17)
 Last Year
(6/4/16)
US Dollar
  0.06970  0.7029  0.7025  0.6809
Australian Dollar
  0.9231  0.9166  0.9268  0.9013
Euro  0.6526  0.6537  0.6620  0.5988
UK Pound
 0.5582  0.5652  0.5716  0.4810
Japanese Yen
 77.04  78.27  79.91  75.23
Chinese Renmimbi    
 4.8051  4.8430  4.8465  4.4114
Trade Weighted Index    
 76.03  76.34  77.04  72.28
Source: Reserve Bank of NZ

Wholesale Interest Rates
  This Week   
(6/4/17)   
Last Week   
(30/3/17)
 Last Month   
(6/3/17)
 Last Year
(6/4/16)
OCR
 1.75%  1.75%  1.75%  2.25%
 90 Day Bank Bill
  2.00%  1,99%  1.99%  2.33%
10 Year Government Bond    
 3.09%  3.18%  3.31%  2.85%
Source: Reserve Bank of NZ