If you are an exporter then here are a few thoughts on what the environment is likely to be for our main export destinations over the coming year.
Starting with Australia which supplies about 38% of our tourists and 22% of our merchandise export receipts things look very strong.
On average the Aussie economy has grown 3.7% the past five years with growth of 3.6% last year.
The unemployment rate is at a 33 year low of 4.1%, retail spending is ahead 8% from a year ago, house prices on average rose over 3% in the December quarter, and businesses are investing heavily with lending to the business sector up 26% in the past year.
The trouble for Australia however is that like ourselves they have run out of resources and that means their underlying inflation rate at the moment is above 3.5% and forecast to remain too high for the Reserve Bank of Australia’s comfort until 2010.
The RBA have increased their cash rate 0.75% so far over the past 8 months and are likely to increase again in the near future. Prospects for most New Zealand exporters continue to look quite reasonable especially if you are supplying a recovering farming sector, the booming mining industry, or even housing where a shortage of properties is pushing up rents and prices.
Plus with the Aussies raising interest rates whereas the chances are we won’t go up again the recent decline in the Kiwi dollar against the Aussie dollar may continue.
The European Union supplies 8% of our tourists and 14% of our merchandise export income and they grew very strongly by 2.7% last year after growth for the past five years averaging just 1.8%. Strong growth has allowed the European Central Bank to take interest rates up over the past two years from 2% to 4%.
At the moment however pressure is on them to cut rates because of retail spending running 2% down from a year earlier and a cessation of growth in industrial production.
But their inflation rate is 3.2% and they are very wary of simply easing now and having to reverse those cuts over 2009 because of a blow-out in inflation.
The environment is likely to be challenging for many New Zealand exporters sending goods there but still overall growth near 2% is likely.
United States supplies about 8% of our tourists and 12% of our merchandise export receipts and things there look fairly dire at least in the first half of the year when recession is possible.
The Federal Reserve had raised interest rates from 1% in 2004 to 5.25% last year and growth was slowing comfortably until the rate rises revealed massively bad lending in the housing sector.
Banks are bleeding capital and decreasingly willing to lend not only to each other but to businesses and individuals.
This is the main worry for the United States – a credit crunch.
To help combat this the Federal Reserve have slashed interest rates from 5.25% down to 3% and further cuts to 2% are likely. Conditions are likely to be challenging for most New Zealand exporters especially those hoping for extra tourists. Visitors here from the United States fell 4% last year.
In Japan growth has averaged 2.1% the past five years and was 2.1% last year with a healthy 0.9% rise in the December quarter.
There is only minor evidence of slowing growth in activity with industrial production growth down, export growth slowing to 11% from 14% a year ago, but dwelling starts off 27% because of earthquake rule changes in the middle of the year.
Confidence indicators are in terrible territory with householders scared by real earnings falling 2.5% over the past year, the fresh collapse in share prices, and knowledge that the central bank’s interest rate of 0.5% leaves little room for movement to improve the situation.
They know also that with the government finances still bad a stimulative fiscal package is unlikely.
Exposure to the United States means export growth is at risk especially with the Yen rising against the greenback over the past year. Plus the population is ageing and shrinking and jobs growth has mainly been in the area of part-time and casual work.
Growth in Japan is likely to come in close to 1% this year but hopefully with some improvement over 2009. For exporters this year could be relatively tough.
In China continued strong growth is likely this year but the authorities are desperately trying to slow things down because inflation is at 7.1% and people are getting increasingly angry about high food and energy prices.
Monetary policy has been tightened and is likely to be tightened further this year and the authorities are likely to allow faster appreciation of the Yuan. It looks reasonably positive for New Zealand exporters.
Finally, in the United Kingdom growth has also been strong recently but manufacturing growth has now ended and retail sales growth has also slowed down.
The housing market is weak with falls in house prices recently but the Bank of England attempting to help things with interest-rate cuts so far of 0.5% and another 0.5% worth of cuts likely in the near future.
The main problem for New Zealand exporters to the UK is likely to be the exchange rate which looks like firming further in the next few months.
Tony Alexander is chief economist at the Bank of New Zealand.
