Economic Week - December 14

by Nick Clark

Improved outlook for exports

The latest forecast for the primary industries show most commodities’ exports being revised up.

MPI’s December Situation and Outlook for Primary Industries forecasts that primary sector exports for the year to June 2019 will come in at $44.3 billion, up 3.8% on the previous year. This forecast is up around $500 million on the September update’s forecast.

Dairy exports have been revised up $180 million to $17.2 billion, due to increased milk production outweighing weaker prices. Meat and wool exports were also revised up $200 million to $9.6 billion due to strong red meat prices outweighing lower volumes. Forestry exports were also revised up $280 million to $6.7 billion but there were downward revisions for horticulture, seafood, arable and ‘other primary sector exports’.

Despite horticulture’s forecast being pared back slightly the industry is still forecast to have a bumper year with its exports still expected to exceed $6 billion (and to be up 12.0% on the previous year).

Although the current year is looking positive, MPI thinks some of its increase might be unwound next year. For the year to June 2020 primary sector exports are forecast to reduce by $265 million (or 0.6%) to $44.0 billion. Much of the forecast reduction will be for dairy (down $310 million to $16.9 billion), with meat and wool also down slightly (down $100 million to $9.5 billion).

Heightened volatility in international markets, some of it geopolitical (e.g., Brexit and the US-China trade dispute) is increasing risks for primary industry exports. Meanwhile other medium-term challenges like the weather, labour supply, biosecurity, climate change, and shifting consumer preferences also need to be factored in.

Bank satisfaction slips

Federated Farmers’ November 2018 Banking Survey has shown a reduction in farmers’ satisfaction with their bank relationships and an increase in pressure being felt by farmers.

Comparing this survey with the previous survey done in May, there has been a 5-point slip in satisfaction to 74% feeling very satisfied or satisfied. A similar 4-point drop was recorded for communication, with 70% feeling it had been excellent or good.

Those feeling they had been coming under ‘undue pressure’ also increased 2 points to 11.6%. Most pressure is being felt by dairy, with 16.2% reporting undue pressure, and especially for sharemilkers, with 20.0%. For non-dairy farmers it was rather less at 7.0%.

It might seem a bit odd that pressure is rising and satisfaction dipping at a time when farm incomes and profitability have recovered from the 2014-16 downturn. Banks generally stood by their dairy clients during that downturn and allowed them to increase debt to get through. Now that times are better - notwithstanding a recent drop in milk prices - banks want farmers to pay debt down.

The next banking Survey will be done in May 2019. We hope for better results then.

Thanks also to the 750 farmers who participated in the survey and congratulations to Barry Goodwin of the Waikato who won the Air NZ Mystery Break.

Budget 2019

The Government’s Half Year Economic and Fiscal Update and Budget Policy Statement was released this week. It provided an update on the Government’s finances and an indication of priorities for Budget 2019.

After reporting a bigger than expected $5.5 billion surplus for the June 2018 year, the Treasury trimmed its 2019 forecast to $1.7 billion. This is mainly due to spending deferred from last year being spent this year. After that dip the surplus is then expected to rise over time to $7.6 billion in 2023.

Core Crown spending will rise about 10 percent to $89 billion in the year ending June 2019 to 29.5% of GDP. Beyond 2019 spending will continue growing in nominal terms but with a growing economy it is forecast to ease back as a percent of GDP to around 28% in 2023.

Despite running operating surpluses, higher capital spending (nearly $42 billion over the five years to 2023) means the Government will continue borrowing. Debt forecasts are however lower than set out in the May Budget. 2018’s net debt to GDP ratio of 20% is forecast to increase to 21% in 2019 before unwinding to around 17% in 2023.

The key fiscal indicators continue to comply with the Government’s self-imposed Budget Responsibility Rules, which have been retained. That’s good.

It should be said that the fiscal forecasts are based on a continuation of reasonably positive economic growth forecasts. GDP is expected to rise from 2.7% in the year to June 2018 to peak at 3.1% in the year to June 2020 before drifting back to 2.3% in the June 2023 year. If the growth forecasts are not met that will affect the fiscals.

Budget 2019 will be the first ‘Wellbeing Budget’. This has been portrayed as a different approach to fiscal policy by going beyond traditional economic objectives and indicators. The Budget will have the following five priorities:

Creating opportunities for productive businesses, regions, iwi and others to transition to a sustainable and low-emissions economy
Supporting a thriving nation in the digital age through innovation, social and economic opportunities
Lifting M?ori and Pacific incomes, skills and opportunities
Reducing child poverty and improving child wellbeing, including addressing family violence
Supporting mental wellbeing for all New Zealanders, with a special focus on under 24-year-olds.

The broad concept of ‘wellbeing’ and the five priorities listed above are hard to take exception to, at least at a high level. More interesting will be how the wellbeing approach plays out in practice. In particular will it impact over time on the key fiscal fundamentals of spending, revenue (including tax), surplus, and debt? We’ll be watching this closely.

Food prices ease

Food prices fell in November, driven by a seasonal fall in fruit and vegetables. Statistics NZ’s monthly Food Price Index showed that food prices were down 0.6% compared to October (and also down 0.2% when seasonally adjusted).

Comparing November to October, fruit and vegetable prices were down 3.6%; meat, poultry and fish were down 0.4% (beef and veal up 0.8% while mutton, lamb and hogget down 0.2%); and grocery items were unchanged (bread and cereals up 1.4% and milk, cheese and eggs down 1.4%).

For the year-ended November 2018, food prices were up 0.4%, well below the overall rate of inflation (1.9%). Fruit and vegetable prices were down 6.7%; meat, poultry and fish were up 3.2% (beef and veal up 3.8% and mutton, lamb and hogget up 12.3%); and grocery items were unchanged (bread and cereals down 0.4% and milk, cheese and eggs up 1.7%).

Dairy and meat push manufacturing down

A fall in dairy and meat processing pushed overall manufacturing sales down for the September 2018 quarter, according to Statistics NZ’s quarterly Economic Survey of Manufacturing.

The volume of total manufacturing sales fell a seasonally-adjusted 1.6% in the September 2018 quarter, led by a 6.7% decrease in meat and dairy product manufacturing.

The 1.6% fall in the September quarter comes after a 1.7% fall in the June quarter. Manufacturing sales were also 0.6% lower than for the September 2017 quarter.

Next week

Look out next week for the releases of September quarter data for Gross Domestic Product and the Balance of Payments.

NIWA Soil Moisture Data

NIWA’s latest soil moisture maps (as at 9am Thursday 13 December) show that much of the east coasts of both islands are wetter than usual, while much of the west coasts are dryer than usual.

Exchange Rates

Over the course of the week the NZ Dollar was down slightly against the Trade Weighted Index and was also down slightly or unchanged most of our main trading partners, except the UK Pound where it was up slightly.

Source: Reserve Bank of NZ

Wholesale Interest Rates

Both the 90-day Bank Bill rate and the 10-year Government Bond were basically unchanged for the week. The OCR has been unchanged on 1.75% since November 2016.

Source: Reserve Bank of NZ