Reliance on Commodity Exports and Elevated NZD Highlight Industry Headwinds

The Bloomberg Correlation-Weighted Index shows that the NZD has appreciated by 3.56% over the past year, sustained by New Zealand’s economy outperforming many other advanced economies. The rising currency is providing benefits to some sectors to the economy, while posing challenges to other sectors. The high NZD is having the most effect pushing agricultural commodity prices, as well as terms of trade, to record highs. Reserve Bank of New Zealand (RBNZ) Governor Alan Bollard noted that the elevated NZD “is having a dampening influence on some parts of the tradable sector and on imported inflation.”

Agricultural commodities, particularly meat and dairy, are benefitting from the elevated currency, while manufacturers’ competitiveness is aggravated as the cost of New Zealand’s exports increase relative to the cost of imports. In its September Performance of Manufacturing Index (PMI) Survey, BusinessNZ highlighted that “the general strength of the NZD has been a major pest for many in the manufacturing sector for some time.” The results of the October BNZ Confidence Survey showed that even agricultural commodity exporters like marine, seed, and lamb producers stressed that a lower NZD would be supportive of growth. The elevated NZD against the EUR, USD, and GBP, the country’s major markets, is also providing challenges to tourism – excluding arrivals for the one-off Rugby World Cup event.

Emerging Market Demand Can Only Sustain the Tradable Sector for So Long

Agriculture is New Zealand’s largest sector of the tradable economy, contributing two-thirds of merchandise exports in 2010, and has been the main driver behind the NZD appreciation. Record high commodity prices and terms of trade are raising rural incomes and strengthening the NZD. Continued demand from China and India for New Zealand’s agricultural products will contribute to higher export incomes. Since the financial crisis struck, 60% of exports are sent to Asia and Australia, reducing the country’s exposure to stagnant advanced economies. As long as Asia drives global growth, New Zealand will benefit. However, a growing reliance on the agricultural sector may signal that New Zealand suffers from Dutch disease. According to this theory, an increase in revenues from natural resources causes the nation’s currency to appreciate, resulting in the nation’s exports becoming more expensive for other countries to buy, and further exacerbating the manufacturing sectors competitiveness.


New Zealand faces many challenges, the most important being the high NZD and dependence on emerging Asia’s insatiable appetitive to sustain its record high terms of trade. While the elevated NZD is tempering imported inflation and contributing to higher export incomes, it continues to provide headwinds to the manufacturing sector. The New Zealand Institute of Economic Research (NZIER) expects “tensions in global markets will also see the NZD remaining higher for longer, further weighing on exports.” The country needs to invest in education and infrastructure to increase the competitiveness of the manufacturing sector. Meanwhile, in the long-term, the agricultural sector will face production competition from developing countries. For agriculture to remain competitive, farmers must either intensify production to remain commodity producers, or become producers of higher value customized products. AgResearch Ltd, New Zealand’s largest Crown Research Institute, expects new technologies will allow farmers to double their output by 2020. Investing in the manufacturing and agricultural sectors will help New Zealand confront the challenges posed by the reliance on commodities and elevated NZD. Hopefully, this will afford the country vaccines against Dutch disease.

Figure 1: Slowdown in PMI, Particularly New Orders, Reflects the NZD Appreciation

Source: BusinessNZ

Figure 2: ANZ Commodity Price Index Easing from H1 2011 Record Highs

Source: ANZ Bank

Figure 3: Top 10 Exports by Destination; More than 60% of Exports Sent Asia and Australia

Source: Statistics New Zealand