Economic Week - June 26

by Manager General Policy, Nick Clark

 

No change, no surprise

The Reserve Bank this week kept both the Official Cash Rate (OCR) unchanged at 0.25% and the quantum for its Large Scale Asset Purchase (LSAP) programme unchanged at $60 billion.  Neither come as any surprise 

The Reserve Bank expressed ‘some cause for confidence’.  It observed that New Zealand has contained the spread of COVID-19 and been able to resume domestic economic activity earlier than it had assumed and that the size of the May Budget’s fiscal stimulus was also slightly larger than it had assumed. 

However, it noted significant economic challenges coming from the severe global economic disruption overseas and in New Zealand, ongoing international border restrictions, and the appreciation of the New Zealand Dollar.

The Reserve Bank therefore believes the ‘balance of economic risks remain to the downside’ and said it was prepared to ‘provide further stimulus as necessary’.  Most likely is an increase of the quantum of LSAPs with $90 billion bandied about by economists. 

But it also said it is ‘continuing to prepare for the use additional monetary policy tools’.  Options include a term lending facility, further reductions in the OCR, and foreign asset purchases.

The next scheduled review of the OCR (and LSAPs) will be on 12 August.

 

Imports slump

Despite a drop in exports an even larger drop in imports drove a large goods trade surplus for the month of May and helped slash the annual trade deficit, according to Statistics NZ’s Overseas Merchandise Trade statistics.

Goods exports were worth $5.4 billion in May 2020, down 6.1% on May 2019.  Exports of milk powder, butter, and cheese held up well, increasing 4.5% to $1.3 billion, and honey exports were strong, but it wasn’t so good for other major export commodities.  Meat exports were down 4.4% to $771 million; forestry down 14.2% to $414 million; wine down 8.6% to $139 million; fruit down 1.4% to $641 million; and wool down 57.6% to $22 million.

Imports were hammered in May, down 25.6% to $4.1 billion. The top three import commodities all posted big falls, with mechanical machinery and equipment down 24.6%; vehicles, parts, and accessories down 60.9%; and petroleum and products down 56.2%.  Among the few to rise was animal fodder, up 69%, as well as (predictably) face masks.

The net result was a goods trade surplus of $1.3 billion in May, a big increase from last May’s surplus of $175 million.

For the year to May 2020 goods exports were worth $60.1 billion, up 1.3% on the previous year.  There were healthy annual increases for milk powder, butter, and cheese, up 9.5% to $16.5 billion; meat up 7.6% to $8.3 billion; fruit up 8.5% to $3.7 billion; and wine up 6.0% to $1.9 billion.  However, there were large drops for forestry, down 20.8% to $4.3 billion; and wool, down 18.7% to $450 million.

With annual goods imports down 5.4% to $61.4 billion, there was a goods trade deficit of $1.3 billion for the year to May 2020, down sharply from a $5.6 billion deficit for the previous year.

 

Next week

Federated Farmers will be running its six-monthly Farm Confidence Survey from 29 June to 6 July.  Members should keep an eye out for an email invitation to participate in the survey and to go into the draw to win a $500 grocery voucher.

 

Rates decisions coming in

Council decisions on their spending and rates are coming in after what seems to have been a very long ‘season’ of consultations on draft annual plans.

COVID-19 has created havoc with council finances.  Non-rates revenue, for example sales of goods and services and investment returns, has been slashed due to lock-down while pressure has been coming on from struggling ratepayers to keep their rates down.

Prior to COVID-19, there were some large proposed rates increases, some greater 10% and many greater than 5%.  Federated Farmers is very active on rates issues, so in late March National President Katie Milne wrote to all councils asking them in the dramatically changed environment to focus on core activities as efficiently and effectively as possible, to shelve ‘nice-to-dos’, and strive to keep their rates increases as low as possible.  Subsequently we backed this up with formal submissions to many if not most individual councils.

Since then and despite pressure from some Government ministers on councils to not cut their rates increases, most councils put their heads down, sharpened their pencils and did the right thing.  They adopted annual plans with much-reduced rates increases with some adopting zero rates rises and one, Horowhenua, doing so well it managed to reduce its rates take.

I am unconvinced about claims that increases in local government spending will do more for economic recovery than allowing ratepayers to keep more of their own money to spend in their economies.  This may be heresy to the new breed of Keynesians and big government interventionists who have been coming out of the woodwork, but apart from spending on infrastructure, local government simply does not have the ability central government has to quickly stimulate the economy through its fiscal, taxation and monetary policy tools.  Property rates are simply not suited to the task and hiking them during a recession is counterproductive.

If it is considered useful for councils to increase their spending to stimulate the economy, the best way to proceed would be for central government funding to be funnelled through local government.  The Government’s ‘shovel-ready’ infrastructure programme is potentially helpful in this respect and councils should work to ensure they get a fair share of the funding from it.

 

NIWA Soil Moisture Data

NIWA’s latest soil moisture maps (as at 9am Thursday 25 June) show the effect of recent rain returning soil moisture to relatively normal levels across most of the North Island, apart from Hawkes Bay and Rangitikei which are still a bit dryer than usual.  However, in the South Island much of Canterbury and Otago remain significantly dryer than usual.


Exchange Rates

The NZ Dollar weakened this week against the TWI and most of our major trading partners, the exceptions being the UK Pound where it was up and the Japanese Yen where it was virtually unchanged.

 

 

NZ Dollar versus

This Week

(25/6/20)

Last Week (18/6/20)

Last Month (25/5/20)

Last Year (25/6/19)

US Dollar

0.6415

0.6434

0.6099

0.6644

Australian Dollar

0.9344

0.9387

0.9329

0.9540

Euro

0.5702

0.5727

0.5598

0.5825

UK Pound

0.5165

0.5133

0.5006

0.5211

Japanese Yen

68.70

68.71

65.65

71.17

Chinese Renminbi

4.5379

4.5623

4.3523

4.5656

Trade Weighted Index

71.28

71.57

69.20

72.63

Source: Reserve Bank of NZ

 

Wholesale Interest Rates

Over the course of the week the 90 Day Bank Bill interest rate was up 2 basis points but the rate for 10 Year Government Bonds was up 9 basis points. The OCR will next be reviewed on 12 August.

 

 

This Week

(25/6/20)

Last Week (18/6/20)

Last Month (25/5/20)

Last Year (25/6/19)

OCR

0.25%

0.25%

0.25%

1.50%

90 Day Bank Bill

0.30%

0.28%

0.26%

1.59%

10 Year Government Bond

0.94%

0.85%

0.61%

1.52%

Source: Reserve Bank of NZ