There appears to be some serious problems developing as far as New Zealand’s economy is concerned.
Some thought when John Key announced that the general election was going to be held two months earlier than usual he was bringing the election as far forward as he could without appearing to be desperate. And the past few weeks have highlighted news that suggests that our brighter future may be no more than a Crosby Textor inspired myth.
First there was Fonterra’s announcement of the forecast milk fat payout for the next year. The expected reduced payout will cost the country $5.6 billion or 2% of GDP next year. At an individual farmer level this will result in a reduced payout of over $100,000 a farm. The causes are a surge in international production and a reduction by China in further purchases due to overstocking. Medium term Fonterra is still confident that prices will come back but this shows the danger in relying on a growth in dairying to deliver us to economic growth nirvana.
Some wondered if the timing of the announcement of the size of the payout represented a conspiracy by Fonterra to hide the bad news until after the election. I do not believe so as it appears that the announcement was made at the same time as previous Fonterra payout announcements. It is more likely that National scheduled election day with the desire of making sure that it occurred before the announcement.
There was further bad news this morning that wholesale milk prices had dropped further and the expected total reduction in payout had increased to $6 billion.
Then there was a move by the Reserve Bank to drive down the value of the New Zealand dollar. The sell down of the dollar happened in August but the attempt was only publicised on September 29. Bill English said the sell down was well timed and the markets had listened. John Key thinks the goldilocks value is 0.65c, which is not too high and not too low. It may have been intentional that the action was taken at a time where news of it was not going to be released until after the election.
The level of the dollar has been a problem for many years. Ever since the Global Financial Crisis New Zealand’s currency has been overvalued and heavily traded. In 2013 it was the tenth most traded currency despite New Zealand’s small size. New Zealand has had a relatively high interest rate and a perception of being a safe investment and this may partially explain this rather startling statistic.
The value of the dollar is not a new issue. In April 2014 David Parker noted IMF’s estimate that the dollar was overvalued by 5 to 15%.
The action will certainly help exporters but increase inflation and hurt importers and consumers.
Labour announced as policy a number of proposals which could have had a beneficial effect. Flexible Kiwisaver account contributions could have been used to take steam out of the economy and regulate the value of the dollar. A capital gains tax and restrictions on the overseas purchasing of farms could also have affected the flow of money into the country.
National ridiculed these policies at every opportunity. But all it seemed to have as an alternative with by way of economic policy was more drilling and farming and an undefined on the never never tax cut.
Recent events show how dangerous it is to rely on an increase in dairy production to sustain growth. And how National’s simplistic approach to economic growth may soon be revealed as being deeply flawed.