Gareth Kiernan is chief forecaster at Infometrics.
OPINION: More and more questions are being raised in the provinces about how badly the lower export prices could affect the primary sector and therefore the entire New Zealand economy.
This increasing risk represents a shift in focus from higher interest rates, which have dominated discussion of economic drags over the past two years as the official benchmark interest rate rose from 0.25% to 5.5% and mortgage rates skyrocketed are a 14-year high.
Higher fuel prices exacerbate economic challenges, place greater strain on families and increase the cost of transporting goods.
These factors – mortgage interest payments, dairy payouts and fuel purchases – are three external influences that significantly influence how much money flows through the New Zealand economy. But despite the challenges posed by lower export prices, it is still high interest rates that will hit the broader economy harder this year and next.
Our analysis shows the annual changes in each of these total payments relative to the overall size of the economy, allowing us to examine which factors had the greatest impact at different times over the past two decades.
Positive numbers indicate that the factor is bringing money into the economy, such as the increase in milk prices in 2013/14. Negative numbers indicate that the factor is draining money from the economy, for example in 2022/23 with the upward trend in mortgage rates.
Higher interest rates have the biggest effect
First, it is worth noting that the effect of rising mortgage payments between 2022 and 2024 is three times larger than the direct effect of falling milk payments on the economy. Unlike 2009 or 2015, the decline in milk prices is not the main factor reducing disposable incomes across the economy.
Our forecasts for mortgage payments through 2024 are influenced by international financial markets, which are still concerned about how long global inflation could remain above normal levels.
As a result, fixed mortgage rates are currently still rising slightly and there is a likelihood that the Reserve Bank may not begin cutting the official policy rate until late 2024.
This lack of short-term easing on the interest rate front is accompanied by a significant easing on the labor market, with the latest data showing the unemployment rate rising to a two-year high of 3.9%.
A sustained rise in unemployment in 2024 is likely to undermine consumer confidence and further reduce people’s willingness to spend.
That being said, it is interesting to note that, on average, fuel price changes have a negative impact on disposable income over time. Improved vehicle fuel efficiency and, more recently, the introduction of electric vehicles have dampened the impact of fuel price fluctuations on other purchasing activities.
Delivered
Infometrics chief forecaster Gareth Kiernan says hospitality and retail saw strong wage growth.
But difficult export conditions cannot be ignored
The most startling aspect of the graph is the enormous volatility in the contribution of dairy revenues to the economy over the past 20 years.
For example, the fluctuations in the farm milk price in Fonterra from US$3.87 per kilogram of milk solids in 2007 to US$7.59 in 2008 and then again to US$4.75 in 2009 caused massive fluctuations in the revenues of the farm Farmers – and the performance of the overall economy.
Similar fluctuations occurred in the mid-2010s, when China bought too much milk powder and then spent the next 18 months running down its supplies. In both episodes, the current estimated $3.8 billion decline in total distributions between 2022 and 2024 appears comparatively mild.
Although dairy products make up the largest proportion of New Zealand’s exports, this is certainly not the entire export picture. In addition to global milk prices falling 36% since their peak in early 2022, international meat and forestry prices have also fallen by around 20% since the second half of 2021, according to ANZ’s commodity price indices.
A fall of around 10% in the New Zealand dollar has softened the impact on exporters’ earnings, but earnings are still significantly lower than previous years. The only export sector to see higher prices is horticulture, but horticulture revenues have also been hit.
Extreme weather events caused fruit export volumes to fall by a record 15% in June 2023 compared to the previous 12 months.
Of course, sales are only half the battle when it comes to determining the profitability of a farm.
The pressure on household budgets from consumer price inflation of up to 7.3% has been well documented, but the pressure on farmers has been less publicized.
Data from Stats NZ shows farm input cost inflation rose to 15% in the second half of 2022 and was still at 7.3% at the middle of this year. Since the end of 2020, agricultural input costs have increased by 25%, including a 72% increase in debt service costs, a 61% increase in fuel costs and a 51% increase in fertilizer costs.
Against this background, we are concerned about the prospects of the agricultural provincial regions in the coming years. Areas such as Gisborne, Waipukurau, Motueka and Waimate have been economic leaders throughout much of the Covid-19 pandemic, but they will all be hit by lower export earnings and reduced farmer spending in 2024.
And although overall activity in urban centers is being boosted by strong immigration flows, the increasing out-migration of Kiwis is most clearly felt in provincial areas. The downturn caused by weaker export prices threatens to increase the number of Kiwis traveling to Australia and beyond in search of better economic conditions.
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