Prime Minister John Key has knocked back suggestions from economists that New Zealand is headed for a large economic slowdown. Speaking at a post-cabinet press conference, Key said he was “not at all panicked”. However, he did accept that there were “a few headwinds there”.
The suggestions stem from a trio of worrying economic factors: low dairy prices, a Chinese economic slowdown and a possible Greek exit from the eurozone. A Greek exit from the euro may make the New Zealand economy more precarious, and the addition of an economic slowdown in China and diminishing dairy prices are likely to be detrimental to the country.
In a remarkable turn of events, the Chinese stock market — which had grown a massive 150 percent over the past 12 months — has, in just the last four weeks, plunged by 20 percent. More worrying for New Zealand is that China is struggling to make its growth target of 7 percent. This slowdown in China’s economic growth means less purchasing of Kiwi exports.
Dairy remains New Zealand’s largest commodity sold to overseas markets, making up 40 percent of exports. With the Fonterra payout forecast at somewhere between $4.70 and $4.80 per kg of milk solids in the upcoming season, as opposed to last season’s $8.40, farmers are struggling to meet their breakeven, which sits at an average of $5.40, factoring in the cost of running the farm and debt interest payments.
Cuts in spending from the agricultural sector are expected to have a large flow-on effect throughout the economy, particularly in rural areas. This leaves an expected loss of $7 billion in GDP.
As dairy prices sit 60 percent below their peak price, predictions are that the Reserve Bank is likely to cut the official cash rate (OCR) three more times this year in July, September and October, taking the OCR down to 2.5 percent.
The cut in interest rates will likely ease the pressure of the failing dairy industry. However, lowering interest will likely accelerate the growing housing bubble in New Zealand, particularly in Auckland.
In its latest market report, ANZ warned of an economic slowdown and the need for a change in fiscal policy, suggesting more government investment is needed.
Labour leader Andrew Little has warned that an economic “storm” could be imminent. “We are on the cusp in my view of the perfect storm. Let’s wait a few days and see how things play out, but we shouldn’t be downplaying it.”
Key, however, has urged economists to take a deep breath and doesn’t believe there is any need for an economic stimulus, though he has said that the government is prepared to be flexible if things change.