OCR rate remains unchanged

March 24
By Nick Clark
The Reserve Bank kept the Official Cash Rate unchanged at 1.75 percent.  This was no surprise at all.  Although inflation has returned to within the 1-3 percent target band and the exchange rate has fallen a bit since February the Reserve Bank is in no hurry to begin tightening monetary policy.  Indeed, the Reserve Bank still thinks the exchange needs to fall further and nothing in its statement suggests that it has changed its view that the OCR could next go either up or down.  

In its statement the Reserve Bank observed that dairy prices have been volatile and that uncertainty remains around future outcomes.  This is certainly true with dairy prices posting a small gain in this week’s Global Dairy Trade auction after two drops that had together knocked almost 10 percent off prices.  

Overall, the GDT Price Index was up 1.7 percent with the crucial whole milk powder, which makes up around 50 percent of volume traded, up 2.9 percent.  Other prices were mixed and skim milk powder, the next biggest product by volume, slumped 10.1 percent.  The average selling price was US$3,101 and 22,498 tonnes of product were sold.

Fonterra’s interim results, released this week, reiterated its current season milk price forecast of $6.00 per kg milk solids and $6.40 cash payout after retentions. Although it cut its forecast for full-year earnings per share from $6.50-6.60 to $6.45-6.55 it maintained its projected payout.  

Total revenue was up 5 percent on the same period last year and net profit after tax up 2 percent.  In April it will pay a 20 cent per share half-year dividend.  Fonterra now expects milk collection to be down only 3 percent for the season, compared to a 7 percent reduction forecast at the start of the season.

Farmer confidence improved in Rabobank’s first Rural Confidence Survey for 2017.  The quarterly survey was undertaken earlier in March and showed that at +27 net confidence in the agricultural economy was up two points on December.  Sheep and beef farmers and horticulture producers both had improved confidence.  Dairy farmer confidence eased on the back of a weaker GDT but they remain the most positive group.

Strong migration continued in February, according to Statistics NZ’s monthly International Travel and Migration Statistics. The annual net inflow was 71,300 for the year to February 2017, equalling the previous annual record set in January. Migrant arrivals numbered 128,800 in the February 2017 year, a new annual record, while migrant departures were 57,500.

Meanwhile, tourism continues to boom.  Annual visitor arrivals for the February 2017 year numbered 3.54 million, equalling the previous annual record set in January. This was up 11 percent from the February 2016 year.  

Statistics NZ’s latest Productivity Statistics, released this week, show that for the year ended March 2016 labour productivity fell by 0.7 percent, capital productivity was up 0.1 percent and multifactor productivity (which takes account of a number of ‘unobserved inputs’) fell 0.4 percent.

Over the past couple of years there have been big increases in employment – 170,000 more people employed over the two years to December 2016.  With labour input growing faster than output it is no surprise, but still disappointing, that productivity growth went negative in 2015/16.  Given that strong growth in labour input has continued in 2016/17 the decline in productivity is likely to have continued.

One bright note is that according to industry breakdowns, agriculture fishing and forestry continues to outperform most sectors for productivity growth.

Our poor productivity performance has caused considerable consternation because our economic policies are considered world’s best practice.  Likely reasons include a small domestic market causing a lack of competition in services; infrastructure which is held back by low population density and difficult geography and topography; and huge distances from export markets which add to transport costs and also impede market knowledge and the building of relationships.  

None of these factors are easy to fix but they do make it even more crucial for New Zealand’s economic and other policies to be top notch.

Although New Zealand’s productivity performance is poor and compares poorly with Australia’s, we’re not alone.  Since the Global Financial Crisis productivity growth has been weak throughout the world.  Although the global economy is finally showing signs of a sustained and broad-based recovery weak productivity is one thing that could stifle it.

Exchange Rates

Source: Reserve Bank of NZ

Wholesale Interest Rates

Source: Reserve Bank of NZ