22 March 2012
John Carran, Senior Economist at Gareth Morgan Investments
While the shares we invest in are mainly global, the New Zealand economy is still important for us to think about here at GMI.
The investments we hold in fixed interest securities and cash are mostly domestic and, therefore, are largely influenced by what’s happening in New Zealand. That means assessing the likely direction of interest rates and thinking about the credit worthiness and attractiveness of the NZ bonds available.
Also, the NZ dollar return on our offshore investments is affected by changes in the exchange rate. The exchange rate is influenced by New Zealand’s economic growth, inflation, interest rates, and the perceived riskiness of investing in New Zealand. That means thinking about how much NZ dollar exposure we need and whether we take on more currency hedging or less.
So here’s our view on where the New Zealand economy and the New Zealand dollar are headed in 2012.
The New Zealand economy
The New Zealand economy has been growing slowly over the past year (1.9% in the year to September 2011). Consistent with this dawdling pace, employment has edged up, but the unemployment rate has been stuck at around 6.5%.
Labour market sluggishness, together with a stuttering property market, is inhibiting New Zealanders’ incomes and their spending. Retail activity got a kick from the Rugby World Cup and has surprised most people with its strength in the period since the party ended. But it’s hard to see such growth continuing this year.
In sympathy with households, businesses have been reluctant to invest in a big way, mainly due to slow demand at home and economic uncertainty caused by the troubles in Europe.
The bright spot for the domestic economy has been the performance of exports, which has benefited from rising prices for our dairy, meat and logs and good domestic growing conditions. Net exports, the difference between exports and imports, have been the main driving factor for economic growth.
Most economists expect the New Zealand economy to gather pace over this year as abating uncertainty in the global economy unleashes some pent up investment spending. By the end of the year and early next year, construction activity related to the rebuilding of Christchurch and the meeting of delayed housing demand in other parts of the country will also add to momentum.
Our own expectation is that the New Zealand economy will grow around 2.5% this year.
The New Zealand dollar
The New Zealand dollar has been one of the star currencies globally this year (up 5% to 21 March against the US dollar). The main driver has been greater investor tolerance for riskier investments as the US economy has improved and the chances of dire outcomes in Europe have reduced.
New Zealand, along with Australia, Canada, and Brazil, are seen as the main benefactors of better global growth as demand for their commodity exports increase. These countries’ currencies have risen accordingly as investors seek to take advantage of their export successes in growing markets.
The New Zealand dollar has risen further than most though. This is partly because our economic cycle is seen as currently leading those of other economies. The expectation is that our Reserve Bank will be one of the first developed country central banks to raise official interest rates early next year to contain rising inflation.
But the New Zealand dollar’s rise is also a vote of confidence in the underlying stability of the New Zealand economy. Our banking system is sound, government debt is low by developed country standards, and we have a stable economic and political environment. In addition, New Zealand produces what the world wants and needs – good quality farm-based food.
It is difficult to predict where the New Zealand dollar will head in the future. Its value, in common with all currencies, is influenced by a variety of factors and events that cannot be easily forecast. Nevertheless, there are strong foundations in New Zealand to suggest our dollar could reach high levels from time to time in the future.