Will Emerging Asia Continue to Fuel New Zealand’s Recovery?

Record high commodity prices are supporting the economy as it recovers from a swath of deadly earthquakes to strike New Zealand in 80 years. Even while New Zealand’s currency has appreciated around 18% against the USD this year, emerging market (EM) demand for commodities (logs, dairy, and meat) continues to soar, which is benefiting New Zealand’s external position. Export prices rose 6.3% q/q in Q1, led by gains in dairy (+5.5% q/q) and meat (+10% q/q) prices. Robust overseas demand pushed the country’s Q1 terms of trade to a 37 year high. Dairy is integral to exports, comprising 25% of export earnings; New Zealand now claims a third of world dairy exports. In April 2011, New Zealand posted its biggest trade surplus in history at NZ$1.1 billion (US$ 890 million), equal to 7% of GDP y/y.

Figure 1: Top 10 Exports by Destination Show Growing Importance on China and East Asia

Source: Statistics New Zealand

Like many commodity driven economies, New Zealand has benefited from rising demand in EMs and China. Rising incomes in EMs are improving living standards, fueling demand for protein-rich diets. Moreover, Chinese milk scandals in 2008 created mistrust in local brands, elevating demand for New Zealand’s dairy products. Between 2008 and 2010, China’s dairy imports surged more than five-fold as the country imported NZ$2.1 billion (US$1.6 billion) worth of New Zealand dairy products in 2010, up from NZ$732 million (US$558 million) in 2008. In 2010, emerging Asia supplied about 40% of New Zealand’s imports, stressing emerging Asia’s importance to New Zealand. Commodity demand from Japan for reconstruction, China’s insatiable industrial appetite, and favorable EM demand will continue to drive intra-Asia trade. Meanwhile, Australian flood induced demand for New Zealand products will be positive for export growth.

According to a Ministry of Agriculture and Forestry (MAF) report, milk production is forecast to surge 5.7% in the year ending May 31, 2012, 2.9% in the 2012-2013 season, and 1.2% the subsequent year, while the values of dairy exports from 2011 to 2015 is expected to climb by 40% to a record high NZ$18.29 billion. Oil-exporting nations increasing dairy consumption, fueled by higher oil prices, and the growing living standards of EMs will underpin high international prices and encourage higher milk production, the report noted. Forestry export earnings are also set to climb over NZ$6.2 billion by 2014, the MAF report noted. Finance Minister Bill English does not expect current high commodity prices to remain in place, though he said they are likely to be “solid for the next few years.”

Figure 2: Seasonally Adjusted Meat and Dairy Product Manufacturing Values on the Rise


Source: Statistics New Zealand

Outlook

As sovereign debt woes continue to entangle Europe, the tragedy in Japan drags the country into recession, ongoing balance-sheet repair causes a slowdown in developed markets (US, UK), and EMs cool down from overheated conditions, it seems the outlook for global growth, yet alone New Zealand’s exports, looks grim. In the most recent RGE Global Economic Outlook Overview, however, RGE expects EMs to continue to be the engine of global growth. RGE sees emerging Asia expanding by an expected growth rate of 7.6% y/y in 2011 and believes “global growth will stay reliant on the rebalancing of global demand away from high-consuming, over-indebted countries like the U.S. to over-producing, investment-driven economies like China.”

The recent deceleration in global activity is worrisome though as much of New Zealand’s recent economic momentum has been supported by improving incomes in the export sector. For some exporters (dairy and meat) higher commodity prices and the appreciation of the NZD have improved incomes, while for other exporters (forestry and manufacturing) the high NZD has reduced competitiveness relative to less costly imports. Meanwhile, the stimulatory impact of higher export incomes has been subdued due to deleveraging in the agricultural sector. While deleveraging in the short-term will depress household demand, in the long-term it will allow New Zealand to reduce one of its key economic liabilities and place it on a stronger financial position moving forward.