Economic Week

July 28, 2017
Dairy farmers received a welcome boost this week, with Fonterra announcing a 25 cent increase in its forecast 2017/18 milk price to $6.75 per kg milk solids.  It also announced a forecast earnings per share range of 45 to 55 cents, making the forecast total available payout to farmers in the 2017/2018 season $7.20 to $7.30, before retentions.

A 25 cent increase in the milk price might not seem large but it means $30,000 extra income for a Fonterra famer producing 120,000 kg per year.  In aggregate Fonterra collects over 1.5 billion kg of milk solids annually, so it means $380 million more for its farmers to invest in their businesses, reduce their debt, and spend in their local and regional economies.

Goods exports were worth $4.7 billion in in the month of June 2017, according to Statistics NZ’s monthly Merchandise Trade Statistics.  This was up $454 million (10.7 percent) compared to June 2016. 

Milk powder, butter, and cheese led the monthly rise, up $372 million (44.9 percent) to $1.2 billion.  Meat exports were also up $29 million (4.9 percent) to $616 million, but wool was down $8 million (17.6 percent) to $34 million.

Goods imports were also up $319 million (7.7 percent) to $4.5 billion, leaving a monthly trade surplus of $242 million.  The main upward drivers were vehicles, parts and accessories (up $219 million or 36.4 percent) and mechanical machinery and equipment (up $98 million or 17.6 percent).  Both are indicators of a robust economy.

For the year ended June 2017 goods exports were worth $49.9 billion, up $573 million (or 1.1 percent) on the previous year.  

Again, milk powder, butter and cheese was the main driver, up $1.3 billion (or 12.0 percent) to $12.5 billion.  This is more than a quarter of the total value of goods exports.  However, meat exports were down $555 million (or 8.4 percent) to $6.0 billion and wool exports were down $237 million (or 31.1 percent) to $523 million.

With goods imports worth $53.5 billion (up $878 million or 1.7 percent), the annual trade deficit was $3.7 billion.

Annual net migration in the June 2017 year has reached another new record high of 72,300.  Statistics NZ’s monthly International Travel and Migration Statistics showed that migrant arrivals were a record 131,400 and migrant departures were 59,100.  Compared with the year ended June 2016, net migration rose by 3,200.  Much of the increase in net migration was due to non-New Zealand citizens, with there being a small net loss in New Zealand citizens.  

Historically there have been consistently large net losses in New Zealand citizens, mainly to Australia.  Over the past couple of years New Zealand has had a small but notable net migration gain with Australia, as fewer New Zealanders left and more returned. Over the past few months though the trend appears to have been moving back towards a net loss with Australia, albeit a small one.

The British and Irish Lions tour saw a big boost in international visitor arrivals with 230,100 in the month of June, up 33,900 (or 17.3 percent) on June 2016’s figure.  The United Kingdom and Ireland’s combined arrivals were up 248 percent to 23,400. 

For the year ended June 2017 international visitor arrivals were 3.6 million, up 10.2 percent on the year before.  There was also an 11.5 percent increase in New Zealanders taking trips overseas, to a record annual 2.7 million.

As you’ll see below the NZ Dollar strengthened this week against all currencies, but especially against the US Dollar.  This came in the wake of the US Federal Reserve Open Market Committee softening its language on inflation and hinting that it would begin balance sheet reduction in September.  However, it also reflects ongoing positive sentiment about the New Zealand economy relative to others.

The stronger NZ Dollar will not be welcome news for exporters, especially those who sell their products in US Dollars.  It will continue to frustrate the Reserve Bank which has been concerned for some time about its impact on exporters.  On the other hand, the stronger NZ Dollar will likely exert further downward pressure on inflation and could mean the OCR staying lower for longer.

Exchange Rates

Source: Reserve Bank of NZ

Wholesale Interest Rates

Source: Reserve Bank of NZ