It’s appropriate, in this first issue of 2004, to wish readers happy and prosperous New Year. Whether the year turns out happy and prosperous, however, may depend on whether you are operating in the domestic economy or the tradeable sector and on the direction taken by the kiwi dollar.
The dollar’s sharp appreciation made the exchange rate potent economic force last year, great for importers and consumers but profit-crimping for exporters. The volume of exports increased five percent in the year to June 2003, but export receipts were down almost six percent because of falling prices and exporters’ incomes dwindled. The decline in New Zealand dollar prices was widespread, but the agricultural sector was particularly hard hit and farm incomes shrunk substantially from the high levels of previous years.
On the other side of the currency ledger, lower import prices encouraged households and businesses to spend on imported goods, often at the expense of domestic producers – another factor which reduced exporters’ incomes. Business investment was encouraged by low prices for imported capital equipment.
Because of these influences on our economic wellbeing, the strength of the currency loomed large in two sets of pre-Christmas official forecasts – one from the Treasury, the other from the Ministry of Agriculture and Forestry.
Mixed prospects
MAF’s economists reported mixed prospects in their “Situation and Outlook for New Zealand Agriculture and Forestry”. They projected rises in international prices for dairy products, lumber and panel products over the next three to four years; they expected beef, pulp and paper prices to rise in 2004-05 before falling again; lamb and mutton prices are projected to fall; log prices are expected to remain relatively static.
The kiwi dollar’s persistent strength is expected to moderate the effects of any increases in returns to producers and processors. More significantly, the agriculture sector’s contribution to the country’s GDP should fall by two percent over the outlook period; from an estimated $8.08 billion in the year to March 2003, to $7.9 billion in the year to March 2007, as farmers respond to five percent drop in their total income by reducing on-farm expenditure.
In their “December Economic and Fiscal Update”, Treasury economists acknowledged the strengthening of global growth that became evident late last year but still expected export volume growth to be “subdued” over much of this year as last year’s exchange rate appreciation bites into exporters’ competitiveness. Their analysis suggests there is lag of around one and half years between rise in the currency and any impact on export volumes. The greatest impact this year is likely to be on non-commodity exports, particularly manufactured goods, forestry and services.
But as the Treasury also pointed out, not all exporters are losers. While the kiwi dollar has risen most sharply against the US dollar, and exports of primary commodities are generally priced in US dollars, it has declined against some currencies and from early 2003 lost ground to the Australian dollar. Australia accounts for around 50 percent of New Zealand’s manufactured goods exports and is an important source of visitor arrivals. Manufacturing exporters who sell finished products in Australian dollars could, therefore, be better off this year, especially if they buy their raw materials in US dollars.
So how much has GDP growth slowed, while the exchange rate has been stimulating domestic activity but discouraging exports? Not much. In the year to September, GDP (production measure) grew by healthy 3.5 percent.
Why? Well for one reason it takes one to two years for exchange rate developments to drag back export volumes and flow through to the rest of the economy. So, Treasury forecasters expect last year’s rise in the exchange rate to have its greatest negative effect on economic activity from late this year.
The good news
The good news for exporters is that Treasury assumes the exchange rate will decline from about June this year. True, the exchange rate path used in the forecasts “is purely technical” but officials say decline at some stage over the forecast period would be consistent with growing balance of payments deficit, smaller gap between New Zealand’s GDP growth and that of New Zealand’s trading partners, and reduced interest rate differentials.
But has the Treasury got it right? The mean expectation among 10 other groups of forecasters in December was the Trade Weighted Index’s rise from an average 63.4 in 2003/04 to 63.7 in 2004/05. The 2004/05 forecasts ranged from 61.2 to 66.2 and at least one forecaster reckoned it will be as high as 64.4 (on average) in 2005/06.
Take your pick.
