So many of the sacred cows of the investment world and financial boom appear to be getting slain lately that it’s becoming increasingly difficult to keep up. Australia appears to have recently lost its edge and shine and now New Zealand’s economic growth is under intense scrutiny. Similar to the Aussie the Kiwi has been an incredible store of wealth during the turbulence since 2008 – 2009. Not necessarily due to the excellent fiscal and monetary policy put in place by their relative governments, but moreover due to their base rates being out of sync with other major developed economies.
It is now accepted that the benefits of Australia’s mineral boom wealth have been severely over estimated, both in terms of employment opportunities and GDP, New Zealand has relied heavily on its one dimensional ‘parasitic’ relationship with Australia in order to ‘chug’ along for decades. Any slowdown Australia experiences, however small, will intensify New Zealand’s predicament.
New Zealand has a market economy which is dependent on international trade, mainly with Australia, the European Union, the United States, China, and Japan. It has very small manufacturing and high-tech sectors, tourism and primary industries like agriculture being the main economic drivers.
New Zealand income levels used to be above much of Western Europe prior to their deep crisis of the 1970s, and have never recovered in relative terms. The New Zealand GDP per capita is less than that of Spain and about 60% that of the United States. Income inequality has increased greatly, indicating that significant proportions of the population have very modest incomes. New Zealand had a very large current account deficit of 8–9% of GDP in 2006, its public debt stands at circa 21.2% of the total GDP, which is small compared to many developed nations.
However, between 1984 and 2006 net foreign debt increased 11-fold, to NZ$182 billion, NZ$45,000 for each person. The combination of a modest public debt and a large net foreign debt reflects that most of the net foreign debt is held by the private sector. At 31 December 2010, net foreign debt was NZ$253 billion, or 132% of GDP. At 31 March 2011, net international debt was $148.2 billion.
New Zealand’s persistent current account deficits have two main causes. The first is that earnings from agricultural exports and tourism have failed to cover the imports of advanced manufactured goods and other imports (such as imported fuels) required to sustain the New Zealand economy. Secondly, there has been an investment income imbalance or net outflow for debt-servicing of external loans. The proportion of the current account deficit that is attributable to the investment income imbalance (a net outflow to the Australian-owned banking sector) grew from one third in 1997 to roughly 70% in 2008.
New Zealand has now lost its top credit grades at Standard & Poor’s and Fitch Ratings, the first Asia-Pacific nation in a decade to have its local-currency debt cut from AAA. Government bond yields rose by the most this year. The outlook is stable after the long-term local-currency rating was reduced one level to AA+ and foreign-currency debt was cut to AA from AA+, S&P said in a statement. New Zealand’s dollar extended its biggest quarterly drop since 2008 after Fitch announced similar moves yesterday.
New Zealand’s dollar slid for a third day, declining to 76.72 U.S. cents as of 6:03 p.m. in Wellington from 77.10 cents yesterday in New York. The currency has weakened 7.5 percent since June. The downgrade “follows our assessment of the likelihood that New Zealand’s external position will deteriorate further at a time when the country’s fiscal settings have been weakened by earthquake-related spending pressures and fiscal stimulus to support growth,” S&P said in its statement. New Zealand’s economy grew 0.1 percent in the three months through June from the previous quarter, less than the 0.5 percent growth economists had predicted. The jobless rate has stayed above 6 percent since the second quarter of 2009, compared with the 4.8 percent average over the past decade. It be only a matter of time before Moody’s attaches a negative outlook to New Zealand in its rating.
New Zealand’s net external debt of 83 percent of gross domestic product in U.S. dollar terms at the end of last year compares with the median of 10 percent for AA-rated nations, Fitch said. The current-account deficit, the widest measure of trade because it includes services and investment income, is likely to widen to 4.9 percent of GDP in 2012 and to 5.5 percent the following year.
If you’re one of the directors of Fitch and Standard and Poor’s you’re unlikely to be welcomed with open arms once the rugby world cup gets to it’s final stages. If the greeters say Ka Mate it’s not a welcome..
Asian markets suffered a mixed experience in overnight and early morning trade, the Nikkei was virtually unchanged at the close at 0.01% up, the CSI closed down 0.26% and the Hang Seng closed down 2.32% having now lost circa 22% year on year. European markets are down in morning trade, the optimism of Germany finally ratifying the ‘doling’ out more money to Greece (who are still at DEFCON 2 stage in terms of probably defaulting) appears to have been replaced by reality. Whilst the troika meets to further flesh out ideas with regards to euphemisms such as “orderly default” the positioning the postulating simply drags on. At what point will the market makers and movers wake up the fact that no solution, or attempt at a short to medium term solution, has actually been put in place?
The UK FTSE is currently down 1.27%, the STOXX is down 1.49%, the CAC is down 1.37% and the DAX is down 2.35%. The SPX equity future is down circa 0.7%. The euro has fallen sharply versus most major currencies particularly the dollar. Sterling has followed this pattern with the exception of the CHF were it has rallied.
The data publications to be mindful off at NY opening (or thereafter) include the following:
13:30 US – Personal Income August
13:30 US – Personal Spending August
13:30 US – PCE Deflator August
14:45 US – Chicago PMI September
14:55 US – Michigan Consumer Sentiment Sep
Perhaps the most prominent is the Michigan consumer sentiment data, the 61 economists surveyed by Bloomberg yielded a median forecast of 57.8, compared with the previous release which was also 57.8. If it falls significantly it could affect market sentiment. The personal spending income figures could also prove to be revealing and of more importance than the income figures as investors are able to get an idea of market sentiment and economic direction as two-thirds plus of the USA economy is reliant on consumer spending. Economists polled by Bloomberg predicted 0.20% compared with a previous figure of 0.80%.