In June, the Reserve Bank of New Zealand lowered its key cash interest rate a quarter of a percentage point to 3.25%, the first time the central bank has cut rates cut since 2011, citing a combination of deflationary pressure, plunging commodity prices and a slowdown in key export markets like China.

Author: Efraim Chalamish

Central Bank Governor Graeme Wheeler indicated that further easing was likely, “depending on emerging data.”

The move reflects New Zealand’s new economic realities, as the country that was among the first to raise interest rates following the 2008 economic crisis is faced with a handful of potentially worrisome statistics. The prices of milk powder, butter, and cheese are falling. Milk prices are down 50% from early 2014, as world production increases and demand from China wanes.

Economic migration, which has boosted the housing market, and post-earthquake construction that led to a building boom in Auckland, New Zealand’s largest city, are starting to peter out.

But Christina Leung, senior economist with the New Zealand Institute of Economic Research, said the slowdown in China is by far the most ominous.

New Zealand—China relations have flourished since the groundbreaking New Zealand—China Free Trade Agreement in 2008, and Chinese demand for New Zealand’s dairy and other agriculture products has fueled its recovery more than any other single factor.

“At the moment, the risks largely stem from the slowing in China, which indirectly feeds through to slowing demand in Australia—New Zealand’s two biggest trading partners,” Leung notes.

New Zealand’s economy grew 3.3% in 2014. In May the government forecast growth of over 3% for 2015, boosted by net migration inflows, wage growth, low interest rates and construction activity. However, according to government statistics, real GDP growth is expected to moderate after that as migration inflows ease and construction growth slows.

 A potential growth engine for the nation is the proposed Trans-Pacific Partnership (TPP), which is nearing passage in the US after rocky negotiatons in Congress. TPP “would be highly beneficial,” says John Ballingall, deputy executive director of the New Zealand Institute of Economic Research.

“It would encourage greater exports through improved market access and better integration into Asia-Pacific’s regional value chains. It will facilitate more foreign direct investment, which New Zealand desperately needs, given its shallow capital markets. The fate of the TPP is a big issue for many New Zealand firms.” 


No comments yet

Add a Comment

You must be a registered user with Global Finance Magazine to comment.

Forgot Password?