Economic Week - May 29

by Nick Clark

Banking pressure eases

The results are out for Federated Farmers’ May 2020 Banking Survey, and they show farmers feeling slightly more satisfied and less under pressure from their banks.
The proportion of respondents feeling ‘satisfied’ or ‘very satisfied’ with their bank lifted slightly from 68% to 69% in the past six months, and those feeling ‘undue pressure’ dropped from 23% to 19%. 

It has been tough over the last few months, with widespread drought and fallout from COVID-19.  Banks have been actively encouraged by the Government to support lending during the economic downturn through measures like the Business Finance Guarantee Scheme. The Reserve Bank also delayed implementation of its tougher bank capital requirement, again to help banks support lending. 

As with the November 2019 survey, Arable is the group with the highest percentage of farmers feeling under pressure and they also have the lowest percentage feeling very satisfied or satisfied.  Meat & Wool farmers are relatively more satisfied than most other groups and they are also less likely to be feeling under ‘undue pressure’. 

Another positive result from the survey is that average interest rates both for mortgages and for overdrafts have come down, by 0.4% each to 4.2% and 6.6% respectively. It would seem recent OCR cuts have been passed on, and it will also reflect people who have re-fixed at lower rates after a few years at higher fixed rates.

The Banking Survey reinforces the importance of banks treating their customers fairly, for farmers and banks to be proactive in their communications, and for farmers to have up-to-date budgets. 

There are significant challenges ahead, with the drought persisting, winter feed stores under significant pressure, and uncertain global trading conditions. Fortunately, the Farm Debt Mediation Scheme will come into effect on 1 July which should help with some difficult conversations.  

Many thanks to the 1,381 respondents to the survey.  

Financial system ‘solid’

The financial system is in a solid position to both weather the significant economic impact caused by the COVID-19 pandemic and support New Zealand’s recovery, according to the Reserve Bank’s six-monthly Financial Stability Report.

However, despite a broad range of support measures, some households and firms will face a significant loss of income. Firms in the tourism, accommodation and hospitality sectors are particularly affected. Banks are less exposed in these sectors, but they will still experience more loan defaults and losses.  The Reserve Bank thinks the bank system can withstand a broad range of adverse economic scenarios while retaining sufficient capital to continue lending. Some non-bank deposit takers will be more vulnerable though as they entered the crisis with low profitability and low financial buffers.

The Reserve Bank observed that agriculture has fared relatively well to date, but there remain vulnerabilities.  More specifically, it had this to say…

Lending to the agriculture sector is a key concentration of risk for the banking system, accounting for around 13% of bank lending, of which around two thirds is to the dairy sector. The sector is vulnerable to income shocks given its dependence on global commodity prices, and pockets of dairy lending have yet to recover from the 2015 downturn.

Low serviceability metrics indicate the agriculture sector has entered this crisis with a limited ability to take on more debt to absorb temporary falls in income. Areas in Northland, Auckland, North Waikato, and Hawke’s Bay have also faced persistent drought conditions since December, creating further stresses. Some highly indebted dairy farms could face solvency and liquidity pressures were milk prices to fall materially.

Before the outbreak became a pandemic, commodity prices for the agriculture sector were stable, allowing the sector to avoid much of the initial economic impacts. Businesses in the primary sector were also generally able to operate under Alert Levels 4 and 3, unlike many sectors of the economy.

However, since COVID-19 became a global pandemic, the outlook has worsened somewhat. New Zealand Dollar (NZD) dairy prices have fallen by around 8% since January, while milk price futures for the 2020/21 season have fallen to around $6 per kilogram of milk solids (kgMS) in May. This is still above the low prices of the 2015 dairy downturn, when the payout including dividend for farmers fell below $5/kgMS. However, there remains a tail of highly indebted dairy farmers from that downturn, who generally require payouts above $6/kgMS to break even. These farms could face significant stress if commodity prices continue to fall.

Border restrictions will also place pressure on labour costs for sectors reliant on seasonal migrant workers such as horticulture, although rising unemployment in the domestic workforce may partially offset this. Further borrowing to manage cashflows during a downturn in prices could also pose a further long-term risk to these sectors’ ability to service debt. 

Imports slump

Goods imports in April 2020 had their biggest fall in more than a decade, according to Statistics NZs monthly Overseas Merchandise Trade statistics.

Goods imports were worth $4.0 billion in April 2020, down 22.0% on April 2019.  Most commodities dropped, with petroleum products down 57.8%, while fertiliser was one of only a few major commodities to post an increase.  New Zealand’s Alert Level 4 lockdown impacted the demand for imports and lockdowns overseas impacted their supply. 

It was a bit better for exports.  Goods exports were worth $5.3 billion in April 2020, down 4.0% on April 2019.  The drop was mainly due to a 69.0% slump in forestry exports.  In contrast milk powder, butter and cheese exports were up 22.3% to $1.6 billion and fruit exports were up 30.7% to $799 million.  Meat exports were down 1.0% to $758 million and wool exports were down 84.3% to just $7 million.  The Alert Level 4 lockdown meant that food production and export could continue but it severely constrained non-food exports, including forestry and wool.

The monthly goods trade balance was a record high surplus of $1.3 billion, more than $900 million more than April 2019’s surplus.

For the year to April 2020, goods exports were worth $60.4 billion, up 2.5% on the previous year.  Exports of milk powder, butter and cheese were up 10.2% to $16.4 billion, meat exports were up 8.0% to $8.3 billion, fruit exports were up 10.5% to $3.7 billion, but forestry exports were down 19.4% to $4.4 billion and wool exports were down 12.2% to $480 million.

Meanwhile, goods imports were worth $62.9 billion for the year to April 2020, down 2.5% on the year previous year.  This resulted in an annual goods trade deficit of $2.5 billion, more than $3 billion smaller than that for the year to April 2019.

ANZ Business Outlook Survey

Although looking slightly better than the preliminary results released earlier in the month, business confidence has remained in the dumps, according to ANZ’s monthly Business Outlook Survey.

Overall, the May survey showed a net 41.8% of respondents expecting general economic conditions to worsen over the coming year, a 25 point improvement on April’s result and 4 points better than the preliminary results. Agriculture is by a long way the most pessimistic sector with a net 82.1% expecting conditions to worsen, a modest 8 point improvement on April’s result.

Turning to own activity, a better predictor for GDP, overall a net 38.7% expect their own activity to reduce over coming year, a 16 point improvement on April’s result and 3 points better than the preliminary May results.  A net 39.3% of agricultural respondents expect their activity to reduce, but again only a modest 5 point improvement on April’s result.

Concern about the global economic situation impacting on commodity prices and impact of the persistent drought will both be weighing on farmers’ minds.  

COVID-19 slashes jobs

Employment fell a record 37,500 in the month of April, according to Statistics NZ’s monthly Employment Indicators.

In seasonally adjusted terms, total filled jobs fell 1.7% in April 2020 compared with March 2020, when it was flat.  April’s fall is the largest in percentage terms and by number since the filled jobs series began more than 20 years ago, in 1999.

The primary sector (agriculture, forestry, and fishing) had the biggest percentage loss of jobs, down 4.3%, while Gisborne was the region with the biggest percentage loss of jobs, down 5.4%.  Both likely reflect the severe impact of the Level 4 lockdown on forestry operations.

NIWA Soil Moisture Data

NIWA’s latest year (as at 9am Thursday 28 May) show that on the eve of winter, and despite rain in some areas earlier in the week, soil conditions continue to be significantly dryer than usual across large parts of the country.


Exchange Rates

The NZ Dollar strengthened this week both against the TWI and against all our major trading partners.  It was up only ever so slightly against the Australian Dollar – virtually unchanged.  

Wholesale Interest Rates

Over the course of the week the 90 Day Bank Bill interest rate was up 1 basis point to 0.26% and the rate for 10 Year Government Bonds was up 2 basis points to 0.72%. The OCR is scheduled to next be reviewed on 24 June.