How To Predict The Economic Growth Of New Zealand

Transcription

1 All Eyes On The Skies Agriculture production constrained Lower stock numbers suggest so We brace for El Nino impact Primary production expected to be a direct drag on growth Dairy revenue to lift, as prices bounce sharply Dairy prices are looking a heck of a lot better than they were a couple of (even though there is a ways to go before they can be called good), interest rates have been tracking down, and a lower NZ dollar is helping to support primary export prices across the board. It is good to see some things moving in the right direction for the primary sector. The downside is that some of the pluses above are associated with the production outlook for the current season not looking so flash. Agriculture production this season is likely to be lower than the prior year, driven by meat and milk. We continue to forecast lower meat and dairy export volumes over the coming year, which is part of the slower economic growth that we anticipate. The current El Nino weather pattern is part of this view, but not all of it. El Nino indicators are certainly very strong and a clear risk to summer/autumn grass growth and agriculture production ahead. We discussed the impacts of historical El Nino s in our previous Rural Wrap. But the impact from every El Nino is different (within the generalities of usually drier in the East and wetter in the West). It s interesting to note that this El Nino is accompanied by a much warmer-than-usual Indian Ocean. We are not weather forecasters but wonder if this situation will reduce the El Nino influence on NZ this time around. The Australian Bureau of Meteorology has noted exactly that in some parts of Australia to date. Here at home, recent heavy rain for parts of New Zealand s East Coast is counter to a usual El Nino pattern. Maybe this dynamic will prevent a double-digit decline in agriculture GDP that is the clear risk judging by the likes of the Southern Oscillation Index alone. It s all eyes on the skies this summer. Still, it is early days in the growing season. The weather is fickle and the impact of the current strong El Nino remains to be seen over the year ahead. Our economic forecasts implicitly include some impact from El Nino conditions. But even if grass growth was normal this season we would still expect agriculture production to be lower than the prior season, given other factors. For more than a year now, we ve had a closer-than-usual eye on the weather challenges to agriculture output. Last season s weak El Nino weather pattern brought difficult conditions to many and drought to some along the East Coast. Add in a poor winter and early spring and it has all been well short of ideal for grass growth. It s either been too dry, or too cold, or too wet (even flooding for some) depending where you are! Production has been, and will continue to be, affected. SOI and Agriculture GDP Recent indicators reinforce our thoughts. Last season s tight feed conditions have been a factor in reducing livestock numbers in New Zealand. Beef+Lamb New Zealand s recently released provisional data for the end of June 215 show: Sheep numbers totalled 28.6 million, down 4.1% on a year (including a 1.5% decline in seriouslydrought-affected Marlborough-Canterbury). Beef cattle numbers totalled 3.59 million, down 2.2% on a year. Annual % change SOI and Agricultural GDP Mar-95 Mar-98 Mar-1 Mar-4 Mar-7 Mar-1 Mar-13 Mar-16 Source: SNZ, Australian Bureau of Meteorology, BNZ Agriculture GDP SOI, quarter average, 9 earlier (RHS) Total dairy cattle numbers totalled 6.51 million, down 2.8% on a year. Prices also played a part in farmer s stocking decisions. Elevated beef prices (thanks to strong US demand and a lower NZD/USD) encouraged cattle culling. This extended to the dairy herd (and amplified by very low milk prices). More than a million cows were culled last season, which is around 2, more than the previous five year average. It all has implications for this season s production and associated exports. Index

2 Overall, the annual-cattle-kill-to-date has been around 9% higher than a year and the highest in a decade. This has generated very strong export volumes to such an extent that NZ is already close to filling its US beef export quota this calendar year. Beef production is expected to pullback around 5% from its elevated level over the coming season. Annual NZ Cow Cull Cows Killed 1,2, 1,, 8, Annual NZ Cow Cull Milk production in August was down nearly 1% on year earlier levels and Fonterra has noted that its milk intake was down as much as 8% on a weekly basis through September. Lower production to this point reflects a combination of poor winter and early spring weather, likely fewer cows in milk and low milk price. The fundamentals of fewer cows and low milk prices are important factors behind our milk production forecast. Most variation in annual milk supply occurs in the second half of the season (during summer and autumn). This is where the current El Nino conditions are most likely to dent production, if indeed they do to any great extent. Milksolid Production 6, 4, 2, est. Source: SNZ, BNZ Annual % change Milksolid Production 212 very favourable summer/autumn conditions Favourable 214 weather and rebound from drought Elevated cow cull, very low prices, poor early-spring weather, some dent from El Nino? Beef+Lamb NZ estimate the total number of lambs tailed in spring 215 was 23.8 million, down 7.2% on a year. This not only reflects fewer breeding ewes (dry conditions and land use change to dairy) but also an estimated 2.6 percentage point drop in lambing percentage. The final lambing percentage could well come in lower when all is tallied, given the poor weather to date. But even on the early estimates, lamb production this season could be down about 6% (and mutton production down by as much as 14%). Wool production is also expected to decline, by around 5%, on the back of fewer sheep. The impact of El Nino conditions may well see more, or earlier, than anticipated slaughter numbers at the expense of lower weights, future production or both. NZ Lamb Numbers Millions NZ Lamb Numbers Source: LIC, BNZ NZ Milk Production Through Million kg milksolids /15 213/14 212/13 211/12 21/ summer/autumn drought 215 combination of strong first half, weak third quarter on poor weather, strong finish Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Source: DCANZ, BNZ NZ Milk Production Through Typically steady pick up through the first half of the milking season and peak through spring Typically a lot more variation in the second half of milking season Dairy Production and Exports Annual average % change 4 Dairy Production and Exports Dairy Export Volumes Source: Statistics New Zealand, Beef+Lamb NZ, BNZ 1 Milk production is anticipated to decline this season. We expect the 215/16 season to be down 6% on the previous year. This is a bigger decline than the 4% drop we previously anticipated on account of a poor start to the season Source: Statistics New Zealand, BNZ Dairy Production (1 quarter earlier) Quarterly

3 Expectations of lower NZ milk production are at least part of a very strong bounce in dairy prices over the past couple of. For instance, the GDT price index is up almost 5% from its lows in early-august. Moreover, some NZX futures prices have doubled over that period. Such price gains point to higher dairy sector revenue, even if milk production was to fall by 6%, or even 1%. To be sure, there are other primary sectors showing production gains, some rather large. For example, kiwifruit volumes jumped sharply this year to be back above levels before they were hit hard by the Psa disease. As the exporting season winds down, volumes to date are up around 3% on year earlier levels. Further kiwifruit volume growth is anticipated ahead. But be careful with the point of comparison here. The revenue outlook might be now around $2b higher than the extreme lows previously feared for the 215/16 season, but revenue is not yet high. And even if revenue associated with this season s milk ultimately comes in $1b higher than the previous year as is starting to look likely, it would still be more than $5b down on that achieved two seasons and almost $2b shy of the average of the past 5 years. Kiwifruit Supplied Trays () 13, 12, 11, 1, 9, 8, Kiwifruit Supplied Estimate In any event it takes time to show up in cashflow and revenue is not profit. But the balance of dairy indicators is looking much better than a few. Importantly, they also bode well for further revenue gains in the following 216/17 season. Indeed, at present, the signals for that season are getting quite strong. But it is difficult to get too bullish just yet given the threat from current emerging market economic growth concerns and the generally negative pulse sweeping through global commodity markets at present. There is a long way to go before the 216/17 season. Dairy Revenue Proxy Billions Dairy Revenue Proxy 6 Indicative using 4 $3.85 milk price 2 forecast, 2% producton decline Source: DairyNZ, LIC, Fonterra, BNZ Outlook using our $5 milk price forecast, 6% production decline But back to this season s production and the outlook for export volumes. Meat and dairy exports account for about a third of total exports (including services). Over the coming year, meat and dairy exports are both expected to fall by around 6%, in real terms. These declines are an important component behind our expectation that overall export volume growth will slow over the coming year. This, in turn, is part of why we see overall GDP growth slipping below 2% over the next year or so (from above 3% in 214). 7, 6, 5, 4, Source: Zespri, BNZ A lower NZD will also help all exporting industries. This will be more pronounced on the price side of things from a primary sector point of view, but also more generally from a volume point of view as a lower currency makes NZ produce more competitive on the world stage. Services exports, including tourism, and manufactured goods exports are expected to lift, supporting overall real export growth over the coming year. Real Exports Growth Annual average % change Total Goods And Services doug_steel@bnz.co.nz Real Exports Growth Source: Statistics NZ, BNZ Quarterly Meat Dairy

4 Key Macro Drivers for Commodity Producers Interest Rates % Interest Rates day bank bill year wholesale Source: Reuters The Reserve Bank lowered the Official Cash Rate (OCR) to 2.75% from 3.% at its September meeting. It completed its statement by saying that some further easing in the OCR seems likely. We continue to expect the Bank the lower the OCR to 2.5% by year end. We formally forecast a cut at its late October meeting, though we see the odds at close to 5/5 for this particular meeting. With the prospect of another OCR cut this year, this is likely to keep short-end fixed rates at current, or lower, levels in the ahead. Longer term rates are influenced by offshore events. We think longer term rates will feel upward pressure from rising offshore rates, as we expect the US Federal Reserve to lift its benchmark rate by year-end. Foreign Exchange Index Source: BNZ NZ Dollar NZD/USD (rhs) 1 11 TWI (lhs) NZD/USD In the past month, we ve hit our end of year forecasts for the NZD against each of the major currencies we forecast. It comes courtesy of NZD s strong relationship with global risk appetite. The latter has deteriorated sharply. The speed and extent of the move lower in the NZD over recent quarters, in and of itself, might bring a period of consolidation or even a small squeeze higher. The bounce in dairy prices is supportive. Higher US interest rates ahead may not be. Looking over the next six, the NZD seems likely to ease further as NZ economic growth slows and interest rates nudge lower. Global Growth Ann avg % chg Consensus Growth s Source: Consensus Economics Inc US Asia ex Japan Main trading partners Eurozone Quarterly Global growth remains sluggish and below trend. The pace of growth in the big advanced economics has picked up, mainly reflecting US recovery. Europe and Japan are growing slowly. Emerging market economies drive most global growth and they are slowing reflected in falling trade volumes and generally softer commodity prices. Economic growth in New Zealand s main trading partners is expected to remain below average over the coming year. It is not the best of backdrops for primary product prices, although each market still has its own idiosyncrasies.

5 Key Commodities Dairy USD Index GDT Dairy Prices and NZD/USD NZD/USD 2.4 Aug 8 Aug 9 Aug 1 Aug 11 Aug 12 Aug 13 Aug 14 Aug 15 Source: GlobalDairyTrade, BNZ Dairy Price (lhs) NZD/USD (rhs) A big gap is negative for dairy farmer milk price calculations - it is closing The GDT price index lifted a cumulative 48% in the three auctions from early-august. It is a very sharp bounce, but off a very low level. Forward price indicators suggest further gains lie ahead. Reduced volumes and expectations of lower NZ milk supply this season are part of the price gains. Fonterra have lifted its 215/16 milk price forecast to $4.6/kgMS. We think there is ultimately a bit of upside to this over the coming year. We see $5 by the time the milk price is finalised this time next year. Whole milk powder (US $/t) Lamb International NZ Lamb Prices UK p/lb US /lb UK Leg (lhs) US Rack (rhs) Source: AgriHQ International lamb prices have been fallen significantly. UK leg prices are down 27% on a year. Strong supply from major lamb exporting countries has contributed to lower prices. China s share of NZ s sheepmeat exports has eased. For farmgate prices in the year ahead, it is still a contest between already weaker international pricing and a lower NZ dollar. We remain of the view that 215/16 prices may average at similar levels to 214/15. El Nino conditions are a downside risk, but fewer lambs are expected out of NZ and Australia this season which offers some possible upside to pricing. Lamb leg (UK p/lb) Beef International Beef Prices US /lb US /lb Prime Steer Cuts (rhs) US Imported Bull (lhs) US beef prices have pulled back from peak levels earlier in the year, but remain at above average levels. US slaughter has increased and there are some question marks around demand. Prices for competing meats in the US are low. China continues to take more NZ beef. Even with some pullback in US beef prices, NZ farmgate prices in 215/16 are expected to average around 1% higher than in 214/15 helped by a lower NZ dollar. Imported bull (US /lb) Source: AgriHQ

6 Millions Forestry Annual total $m 4,5 4, 3,5 3, 2,5 2, 1,5 1, 5 Log, Wood and Wood Article Exports Source: Statistics New Zealand Quarterly The annual value of forestry exports are around 9% below year earlier levels. But there have been signs of stabilisation, even improvement, over recent with export values in the three to August 8% higher than the same period a year earlier. A lower NZD, particularly against the USD and CNY, has helped. In-market pricing remains weak. On the domestic front, construction indicators have swung higher over recent after reaching a plateau over the year before that. Residential building consents in particular were very strong in July and didn t give much back in August. S1/S2 log price (NZ $/t) Oil US $/barrel Oil Prices Brent WTI The fundamental drivers of global oversupply remain with OPEC pumping at 32.3 million barrels per day (vs their agreed target of 3 million), and US production still near historic high levels of 9.15 million barrels per day despite weak crude prices. Coupled with the oversupply are demand concerns stemming from economic growth slowing in China and other emerging markets. Crude oil prices have halved from a year Source: Reuters West Texas Intermediate (US $/b) Weather Index Southern Oscillation Index 3 2 La Nina El Nino Source: Australian Bureau of Meteorology, BNZ ly The weather challenge to farming continues. It s been too cold, too dry, or too wet depending on where in the country you are. Meanwhile, the El Nino weather pattern continues to strengthen. The Southern Oscillation Index, as one indicator, continues to push further into El Nino territory. NIWA has stated that by many measures, the current event is tracking close to the 1997/98 El Nino (the strongest since 195), and is expected to intensify further over the next 3. In general during an El Nino, NZ tends to experience stronger or more frequent winds from the west and south-west leading to dry conditions in the east and more rain in the west. It is a risk to summer/autumn grass growth. While every El Nino is different, current indicators pose a serious risk to the current season s agricultural production.

7 Quarterly s s as at 2 October 215 Key Economic s Quarterly % change unless otherwise specified Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 GDP (production s.a.) Retail trade (real s.a.) account (ytd, % GDP) CPI Employment Unemployment rate % Avg hourly earnings (ann %) Trading partner GDP (ann %) Interest Rates s Historical data - qtr average Government Stock Swaps US Rates Spread data - end quarter Cash 9 Day Libor US 1 yr NZ-US Bank Bills 3 month Ten year 214 Jun Sep Dec Mar Jun Sep s Dec Mar Jun Sep Dec Mar Jun Sep Exchange Rates (End Period) USD s NZD s EUR/USD USD/JPY GBP/USD NZD/USD AUD/USD NZD/EUR NZD/JPY NZD/GBP NZD/USD NZD/AUD TWI Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar

8 s s as at 2 October 215 March s December s Actuals s Actuals s GDP - annual average % change Private Consumption Government Consumption Total Investment Stocks - ppts cont'n to growth GNE Exports Imports Real Expenditure GDP GDP (production) GDP - annual % change (q/q) Output Gap (ann avg, % dev) Household Savings (gross, % disp. income) Nominal Expenditure GDP - $bn Prices and Employment - annual % change CPI Employment Unemployment Rate % Wages - ahote Productivity (ann av %) Unit Labour Costs (ann av %) External Balance Account - $bn Account - % of GDP Government Accounts - June Yr, % of GDP OBEGAL (core operating balance) Net Core Crown Debt (excl NZS Fund Assets) Bond Programme - $bn Bond Programme - % of GDP Financial Variables (1) NZD/USD USD/JPY EUR/USD NZD/AUD NZD/GBP NZD/EUR NZD/YEN TWI Overnight Cash Rate (end qtr) day Bank Bill Rate year Govt Bond year Govt Bond year Swap year Swap US 1-year Bonds NZ-US 1-year Spread (1) Average for the last month in the quarter

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