Dairy's down but don't panic… New Zealand's economy is still in the middle of the pack across the OECD, says HSBC's Paul Bloxham

HSBC’s “rockstar” economist says the New Zealand economy may not be performing as well as it did in its 2014 glory days, but is far from hitting rock bottom.

The bank’s New Zealand and Australia chief economist, Paul Bloxham, who in January last year said New Zealand would be the “rockstar economy of 2014”, concedes “things have slowed down a bit”.

While New Zealand had the fastest growing economy in the OECD last year, Bloxham says New Zealand’s now likely to be “more middle of the pack across the OCED economies, rather than the outperformer”.

He says the dairy downturn is largely to blame.

“The challenge is, can the economy absorb whatever the world has to offer – that is whatever shocks come along – and absorb it well and still continue to grow.

“Our view is, although dairy prices have come down a long way – they’re about 50% off their peak levels – the New Zealand economy appears to be absorbing that reasonably well. And to still grow at over 2% is still a pretty reasonable performance when you compare it to the rest of the world.

“We do think New Zealand’s still doing OK. Growth is still reasonably robust. We think growth will be about 2.3% this year, and it’s being supported by things outside of the dairy sector.”

Dairy not headed back to last year’s highs anytime soon

“We think there could be a little more upside to the dairy price yet, because it had gotten to such extraordinary low levels,” Bloxham says.

“But we would be surprised if dairy prices got back to the highs that you’d seen 18 months ago. They’re probably not headed back to those sorts of levels anytime soon.”

The GlobalDairyTrade trade weighted index plunged 57% (in NZD terms) from a high in February last year to a record low at the beginning of August this year. It’s since started to rebound to a level around 34% lower than in February last year. The next GlobalDairyTrade auction result is due out Wednesday morning New Zealand time.

Bloxham notes demand for New Zealand dairy products is down from China, and there’s been a boost to supply from Europe and Australia.

He reiterates, “Our message at the moment is, dairy is down, but don’t panic. There are other things that drive New Zealand’s growth.”

Construction, tourism and education to fill the void

Bloxham says the construction story still has further to run.

He maintains residential building growth to meet Auckland’s housing shortage will make a larger contribution to GDP than the Canterbury rebuild, which is levelling out.

Auckland’s construction growth will continue into the future, further buoying the economy.

Bloxham says tourism and education exports will collectively overtake dairy to be New Zealand’s largest export earner this year.

He says these travel services are led by Chinese arrivals, which have increased by 180% over past five years.

“The tourism story, the construction story, will be supports for growth that will more than offset the weakness we’re seeing in the dairy sector and still leave growth at a fairly reasonable pace,” Bloxham says.

Migration reaching its peak

As for New Zealand experiencing record levels of net migration, Bloxham says this is cyclical.

He notes net migration picked up strongly as Australia’s growth slowed with the mining boom’s end. There are fewer kiwis leaving New Zealand’s better performing economy, and those who had moved to Australia are returning.

“The Australian economy is continuing this transition. It’s continuing to rebalance its growth from a mining lead story to a non-mining lead story, and growth we think will head back towards trend sorts of rates in Australia next year, and that should mean you’ll start to see the level of migration to NZ level out.

“We don’t think it’s going to fall dramatically anytime soon, but it is getting close to its peak.”

Nonetheless, Bloxham expects migration rates to stay high, boosting economic growth.

Most Aucklanders “benefiting” from sky-high prices

Bloxham recognises Auckland’s housing bubble is “a bit of a concern”, yet says most Aucklanders are actually benefiting from the value of their properties soaring.

“The Auckland housing market is still growing at a rate that is probably unsustainable. If it keeps going at this sort of pace, at some point in time there will need to be a slowdown, or perhaps a correction,” he says.

However, “The owner-occupation rate is relatively high. Most people own a house… So most people do benefit from rising house prices, because the price of the asset they own is going up.”

Bloxham admits the situation is leaving those who aren’t already in the housing market, and are looking to get enter it, in a tough spot.

“But overall it is a benefit,” he says.

He says it’s a matter of striking a balance. While rising house prices are a sign an economy’s doing well, prices shouldn’t run ahead of incomes for long periods of time, as they’re doing in Auckland. 

Inflation to reach its target band by mid-2016

HSBC expects the Reserve Bank of New Zealand to cut the Official Cash Rate a further 25 basis points to 2.50% this year.

Comparing New Zealand to the rock band, Nirvana, Bloxham says the strong growth and low inflation New Zealand’s experienced over the past couple of years has been a “heavenly combination”.

He notes the high New Zealand dollar, low oil prices and strong inward migration weakening wage growth, had kept inflation down last year.

Yet he believes cuts to the OCR from 3.50% to 2.75%, and the fall of the New Zealand dollar will be “sufficient” to get inflation back to its target band by the middle of next year.

TPPA to support exporters

Bloxham says the Trans-Pacific Partnership Agreement, which has finally been agreed upon by member countries, is generally positive.

While the deal could’ve been better for dairy exporters, he says overall it provides New Zealand agricultural exporters with greater access to overseas markets.

“Probably more importantly, will be all the various measures that are in the agreement on the services sidereducing licensing requirements, lining up regulations across countries – things that help to promote services exports – businesses services in particular,” Bloxham says.