ANZ – Key themes for NZ in 2015

The economic upswing is one thing, but the New Zealand economy is also going through a material transition. We’re moving from legacy to opportunity, amidst the demands of rebuilding our second-largest city, housing shortages in our largest city, demographic shifts, global wobbles and an overvalued currency. We present six themes intertwined with this journey. A common sub-theme is the heightened importance of the microeconomic story. We’re optimistic about New Zealand’s medium-term prognosis, amidst a very elevated risk profile across the global economy.


There is greater performance variability across and within industries when structural forces collide with cyclical ones. A nimble and fast-adapting education sector will be critical. Leadership needs to trump populism. The microeconomic agenda – both at the firm and policymaker level – will be key. Microeconomics always matters; it matters more when the economy is navigating fast-moving structural tensions.


We are eyeing seven “local focal points” (beyond dairying) over the coming year. Structural metrics – what are the “binge indicators” telling us? The NZD – will it fall? The Christchurch rebuild – is a post-rebuild hole looming? Inflation – where is it? Thinking beyond China – many eggs in many baskets? Auckland housing – how worried should we be? Net immigration – how long will this continue?


Growth may have peaked, but the trend for NZ.Inc still looks favourable. Key reasons to be optimistic of solid trend growth include improving productivity, rising capital intensity, unlocking growth from areas of advantage (including an abundance of natural resources), growing signs of a more tech-savvy economy, a well-functioning political system, greater signs of execution on opportunities across the tradable sector, a complacency virus at bay, and a sound microeconomic agenda.


Low dairy prices dominate as a key downside risk for New Zealand. We project milk powder prices to recover to around US$2,800-$3,000 per tonne by mid-year and then US$3,300-US$3,500 per tonne by early 2016. This means a farm-gate milk price of $4.35/kg MS in 2014/15 and a soft opening price in May of around $5.75/kg MS. Cash-flow will tighten dramatically in H2 2015. It will necessitate a cut to capital, core and discretionary expenditure to break even and avoid a debt blowout. That will create some issues across the economy, but it looks manageable.


Offshore risks abound but one will dominate: the prospective start to the Fed normalising US monetary policy, and the impact that process could have on both liquidity-driven asset values and regions that leveraged heavily during the era of incredibly low rates. While the BoJ and ECB are still expanding their balance sheets, it is the Fed that is ultimately key. Asset valuations and investment thematics must morph away from liquidity and towards the economic fundamentals as policy returns to semblances of a more normal setting. We expect the path for policy normalisation to be haphazard with significant volatility and a strong potential for dislocation.


A degree of inequality can be expected (and is necessary) in any market economy. However, rising income inequality dampens economic mobility, reduces education standards, and makes an economy less flexible. Rising social tensions can also lead to political instability. There are good economic reasons for addressing inequality. New Zealand looks to be pushing a number of the correct buttons but has a way to go. Job creation, raising educational achievement, and encouraging flexibility across the education sector need to be at the epicentre of a multi-pronged strategy.

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