Economic Week - April 3

by Nick Clark

What next for the economy?
As New Zealand completes its first week of lockdown, economists have been thinking about where to next for the economy.  It’s not pretty.
As an example, Westpac thinks GDP fell by 1% in the March quarter just finished and predicts it will slump 14% in the June quarter, with unemployment rising to 9%.  Although expecting a strong 9.9% rebound in the September quarter it reckons GDP in 2020 will end up 5-6% lower than in 2019.  It’s a similar story from other economists.
These forecasts are highly uncertain.  They rely on big unknowable questions like how long the current level 4 lockdown lasts and then how long we stay at level 3 before returning to level 2 and eventually level 1.  De-escalation is not a given – level 4 could stay in place for some parts of the country even if the rest of country moves to level 3 and if the virus flares-up we could end up back at level 4.   And that’s before considering at what point our borders will be reopened to international travel and if so to which countries’ travellers?
Even when borders are reopened, international travel will recover only slowly thanks to lingering virus concerns and poor economic conditions leaving people and businesses less discretionary income to spend.  Given the importance of tourism and other service industries to exports, the economy and employment, this crisis will weigh on GDP not just immediately but well into the future.
The lockdown will also impact goods exports, especially locked downed industries like forestry and non-food manufacturing.  But even for our food exports, which are still flowing, the state of our key trading partners’ economies will have a major impact on prices, especially for premium food products destined for food service, such as restaurant meals.
A long and deep global recession will inevitably hit commodity prices, even food.  International commodity prices have softened since the start of the year and they will soften further.  The sharply lower NZ Dollar will act as an offset but only to some extent.
And then there’s the economic policy response.  As some point the huge sums being borrowed and spent to get us through the crisis will have to be pared back and paid back.  Even putting that aside tax revenue will be down while operating spending will be up.  Huge fiscal deficits for this year and next year are a certainty. 
Short-term deficits are unavoidable and excusable but if the Government is to get its finances in order and stop debt spiralling out of control, tough decisions will have to be made around spending and taxation.  If we don’t get those decisions right it will weigh heavily against any economic recovery and leave the finances severely weakened for the next shock not to mention the looming superannuation and health costs associated with an ageing population. 

And what next for farming?
The vast majority of New Zealand’s agricultural production is exported so forecasts for exports will be crucial for farm incomes.
MPI’s March 2020 update for primary sector exports predicted a reduction in growth for the current year to June 2020 from 3.4% to 1.0% and then a modest 2.4% increase for the following year.  However, its forecasts were made prior to most of our main trading partners going into lockdown and putting their economies on ice.  If MPI’s forecast proves right it would be a very good outcome but more likely we’ll see those forecasts revised down.
Despite drops at recent Global Dairy Trade auctions, Fonterra’s forecast milk price remains in the range of $7.00-7.60 per kg MS, although it’s likely to be closer to the bottom of the range than the top. The drought is impacting on milk production, especially in the North Island and it’s causing feed headaches which means the impact on production and costs will linger even once it rains.
Published meat schedules show lamb prices on a par with the same time last year, but mutton prices down.  Beef prices are down sharply, mostly due to the drought causing a glut of cattle being sent to the works.  Meat processors are continuing to operate through the lockdown, but it’s a challenge for them to operate in a way that minimises health risks to workers.  Reduced productivity is inevitable and there will be delays in getting stock processed.
Prices for feed grains have recently eased slightly, although maize grain and maize silage prices have firmed. Prices for palm kernel have skyrocketed due to supply issues, making home grown grain products much more competitive.
The bigger worry though will be the upcoming 2020/21 season. The world economy has taken a massive hit and consumers will have less money in their pockets.  While people have to eat, there will be less demand for premium food.  If global commodity prices continue to fall it will flow to farmgate prices – just as in 2009 in the wake of the Global Financial Crisis.
Farm profitability will be squeezed, especially if input costs don’t fall in step but on the brighter side, lower interest rates should work their way through to farmers (if not then ask your bank why not), fuel prices have fallen, and the economic climate might make it easier for farmers to recruit and retain skilled staff and that would ease a pressure point. 
Speaking of pressure, over the past two years banks have been exerting pressure on farmers to pay down debt and they’ve been tightening conditions on lending.  This has especially been the case for dairy, where the sector’s debt has been cut by $1.5 billion over the past year.
Banks are going into bat for businesses and residential customers affected by coronavirus, passing on the cuts to the OCR and offering six-month principal and interest payment holiday for mortgage holders and SME customers whose incomes have been affected by the economic disruption from coronavirus.  They’re also working with the Government on a $6.25 billion Business Finance Guarantee Scheme for small and medium-sized businesses.
Although Rabobank has come out offering support for its rural customers, it remains to be seen if the other banks will go easier on farmers.  We will be running our next Banking Survey in May and it will give us a handle on whether the recent trends of falling satisfaction and rising pressure continues or are arrested.
Agriculture will do much of the heavy lifting to save our economy.  Carry on farming but in doing so continue to pay down debt and get ready for an uncertain and challenging next 12-18 months.

Reserve Bank moves again
More unconventional policy was announced this week by the Reserve Bank. 
This time it was a new weekly Open Market Operation which will provide liquidity in exchange for eligible corporate and asset-backed securities. It’s another tool to provide additional liquidity to corporates and support smooth market functioning.  It will encourage banks to continue funding corporate clients by purchasing their debt securities, given the confidence that these securities can be funded by exchanging them with the Reserve Bank for cash.
The Reserve Bank is making a habit of Monday morning specials.  Will next Monday also see something out of the ordinary?

Dairy debt squeezed again
The Reserve Bank’s monthly Sector Lending Statistics show a further squeeze on agricultural lending, especially to dairy farmers.
Agricultural sector lending was worth $62.8 billion in February 2020, down $332 million on January.  On an annual basis it was down 0.2% compared to February 2019.
Most of the monthly drop was felt by dairy farmers, with its lending down $255 million to $40.0 billion.  Lending to dairy is now down nearly $1.5 billion (or 3.5%) compared to the same time last year.
Lending to sheep, beef and grains farmers was down $40 million for the month to $15.0 billion but was still up $663 million (or 4.6%) for the year.
Lending to horticulture was up $17 million for the month to $5.1 billion and was up $595 million (or 13.2%) for the year.
Although lending to agriculture was down, annual lending growth remained strong for the housing (up 7.2%) and business (up 5.9%) sectors.  It was down for personal consumer (down 0.6%).

Business Confidence Tanks
No surprise that ANZ’s Business Outlook Survey for March has shown a dramatic collapse in business confidence.
A net 63.5% of businesses expect general economic conditions to worsen over the next 12 months, crashing 44 points on February’s survey.  This is close to a record low for the survey, which began in 1988.  Agricultural respondents were the most pessimistic, with a net 79.4% expecting economic conditions to worsen but its 15-point drop was the smallest of the sectors.  
Meanwhile, a net 26.7% expect their own business activity to reduce over the next 12 months, down 14 points.  This is a record low for the survey.  Interestingly farmers felt a little less pessimistic about their own activity with a net 26.5% expecting it to reduce, a four-point improvement on February’s survey.
The slightly less terrible results for agriculture reflects farmers in February already being deeply pessimistic, reflecting their concern at the time about the drought and the impact of Covid-19 on exports into China (as opposed to domestic implications, which is the concern now).  It might just also reflect a realisation that agriculture is the sector that will do the heavy lifting for New Zealand’s economy.

Building consents strong in February
3,285 new dwellings were consented in February 2020, according to Statistics NZ’s monthly Building Consents Issued statistics.  This is up a seasonally adjusted 4.7% from January.
For the year to February 2020, 37,882 new dwellings were consented, up 10.6% from the year to February 2019.  This is the highest level of dwelling consents since the mid-1970s.
The annual value of non-residential building work consented was $7.3 billion, up 2.3% from the February 2019 year.  Farm buildings consented were valued at $279 million, down 13.9%.
It remains to be seen how much of this intended construction activity will eventuate over the coming months.

All regions growing
Economic activity across all 15 regions increased in the year to March 2019, according to Statistics NZ’s annual Regional Gross Domestic Product statistics.
Gisborne had the largest percentage increase (7.2%), followed by Marlborough (6.6%) and Waikato (6.4%). The smallest increase was for Taranaki (1.8%).  The national GDP increase was 5.0% (not adjusted for price effects).
Wellington had the highest GDP per capita, at $74,251, followed by Taranaki ($73,029) and Auckland ($69,974).  Northland had the lowest GDP per capita ($42,104).  The National GDP per capita was $62,165.
Southland was the region with the biggest contribution by agriculture, fishing and forestry (17.7%), followed by West Coast (13.9%), Marlborough (11.1%), and Gisborne (11.0%).  Auckland had the smallest contribution (0.3%), followed by Wellington (0.6%). 

NIWA Soil Moisture Data
NIWA’s latest soil moisture maps (as at 9am Thursday 2 April) show the effect of heavy rain the Wairarapa and Kaikoura areas in particular.  However, most of the North Island’s soils remain significantly dryer than usual. 

Exchange Rates

The NZ Dollar recovered further this week, rising against the TWI and against the US Dollar, the Euro and the Renmimbi.  However, it fell against the Australian Dollar, the Pound, and the Yen.



NZ Dollar versus

This Week


Last Week (26/3/20)

Last Month (2/3/20)

Last Year (2/4/19)

US Dollar





Australian Dollar










UK Pound





Japanese Yen





Chinese Renminbi





Trade Weighted Index





Source: Reserve Bank of NZ


Wholesale Interest Rates

After being highly volatile over preceding weeks, wholesale rates were stable this week. The 90 Day Bank Bill interest rate unchanged on 0.49% and the rate for 10 Year Government Bonds was up 1 basis point to 1.11%. The OCR is scheduled to next be reviewed on 13 May.



This Week


Last Week (26/3/20)

Last Month (2/3/20)

Last Year (2/4/19)






90 Day Bank Bill





10 Year Government Bond





Source: Reserve Bank of NZ