Weekly Economic Commentary 13 February 2023
Analysis and forecasts of the economy and markets, along with previews of data for the week ahead.
Read full report here (PDF 831KB)
Cyclone Gabrielle buffets the north.
As the week begins, New Zealand is grappling with another severe weather event. The effects of cyclone Gabrielle have been especially heavy in the upper North Island, where many families and businesses are still dealing with the effects of January’s floods.
With the cyclone still making its way across the country, it’s too early to put a price tag on the cost of these events. However, the combined impact of the floods and cyclone have already resulted in significant damage to housing and other assets, and have caused disruptions to economic activity. The cost of January’s floods was already estimated to be upwards of $500 mil.
While the next few days will see disruptions to economic activity, over the coming months there will be increases in spending associated with the replacement of damaged items and repairs to property. With the construction sector already stretched, those repairs could take an extended period to complete. Some existing planned work could be delayed to make way for essential repairs.
There will be some cost increases in the wake of these events, with most of that related to construction. The RBNZ is able to look through temporary price rises associated with events like floods or storms. However, it’s harder for them to do that in the event of a protracted boost to prices. At the current time, with inflation already running red hot, we expect another large 50bp hike from the RBNZ next week.
Open for business.
China is back open for business. And this is a welcome development for New Zealand Inc. Similarly, the reopening of our border last year and the subsequent rebound in the tourism industry continues to provide a significant boost to our economy. Together these developments will help offset some (but not all) of the weakness in the domestic economy that we expect to see later this year.
China is the key market for our main exports, and we expect the Chinese economy’s growth to double to 6% over calendar 2023 (from around 3% growth over 2022). In turn, we expect that to lift demand for our food exports and similarly to take our food export prices higher.
Last week, we had the first sign that this dynamic is starting to play out. Global dairy prices posted a solid lift at last week’s auction, with overall prices lifting 3.2%. Before the auction, global dairy prices had been on a steady downward path, dropping by around a third from the peak back in March 2022. Within the overall price lift, milk fat prices led the way, with butter prices jumping by 6.6%. This jump is the clearest evidence that the price rebound stems from the lifting of China’s Covid Zero policy. Indeed, Chinese consumers are now largely free to move about and return to restaurants, cafes and bakeries. And those are just the places that use large amounts of butter.
In contrast, the price signals in New Zealand’s meat markets are less clear. Farmgate prices have bottomed rather than lifted so far this year, albeit that is somewhat against the normal seasonal trend where prices would normally fall through the summer and autumn.
That said, there is some hint that a broader upward move in prices is underway. Lamb flap prices, a product popular in China, have lifted over recent weeks. We expect mutton and lamb prices to soon start ticking higher over coming months too. Similarly, beef prices are likely to strengthen as Chinese demand lifts as well as on the back of a tightening in beef supply.
New Zealand’s tourism sector is also making the most of being back open for business. We estimate that tourist numbers are back at around two-thirds of the pre-Covid level. Notably, it’s tourists from markets like the US that have exceeded our expectations. In fact, the number of US tourist arrivals have effectively doubled each month from September through to November, noting that the spring months precede the normal summer surge. We expect this rebound to continue, with Delta Airlines recently announcing the opening of a new Los Angeles-Auckland route later this year.
Tourism operators will now also be able to welcome Chinese visitors back into the mix. Pre-Covid, China was New Zealand’s second-largest tourist market. And based on the patterns of recovery in other markets, we expect a swift recovery in Chinese tourist arrivals over the course of this year. Interestingly, Chinese airlines kept their fleets flying during the pandemic, meaning there are few barriers at the Chinese end to tourists returning to our shores.
Finally, the education sector is also set to rebound much sooner than expected. The Chinese government has mandated that students must study in-person (as opposed to online) for their overseas qualifications to be recognised. This requirement, as well as university and polytech semesters getting under way soon means that Chinese students are likely to arrive en masse over the year, if not the next month or so. Export education was a significant earner for New Zealand pre-Covid, accounting for around 5% of New Zealand’s total goods and services export values back in 2019.
All up, this paints a relatively positive picture for New Zealand’s trade sector and puts it in stark contrast with the likely weakening in the domestic economy over the year. Recall that we anticipate that as interest rates increasingly bite on households and their spending, the economy will dip into recession in the second half of 2023 and early 2024. However, we do foresee a relatively shallow recession, with the strength in the New Zealand trade sector partially offsetting weakness elsewhere in the economy.
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