Economists gloomy about how far dairy prices will recover

Monday 24th August 2015

The outlook for dairy prices remains dire in the near term and will force the Reserve Bank to further cut interest rates this year, said economists at an Auckland conference, who collectively had a doom and gloom outlook for the New Zealand economy.

Deutsche Bank chief economist Darren Gibbs said at the Standard & Poors economists breakfast that the only positive in the near term for dairy prices was the risk of a drought this summer, due to El Nino weather patterns.

“It would be good for dairy prices but crucify some farmers in the industry,” he said.

ANZ Bank New Zealand senior economist Sharon Zollner said the dairy industry had mistaken cyclical strength for long-term structural strength. China’s share of New Zealand’s dairy exports has fallen by 36 percent to 18 percent, with other countries taking up the slack at bargain-basement prices, she said.

Zollner doesn’t see a sharp rebound in supply and demand, with long-term dairy prices unlikely to return to previous levels.

“A lot of these factors have been cyclical but there is a possibility we have over invested in the dairy sector,” she said.

Gibbs said the increase in tourism and education exports is helping offset some of the economic downturn from dairy and he’s expecting that trend to continue although we haven’t been able to monetise the tourism boom that well.

“Tourism is a low productivity business and extremely labour intensive and there are environmental issues as well. It has its limits,” he said.

All the economists expect the Reserve Bank to make further cuts in the official cash rate from October to as low as 2.25 percent due to slowing economic growth.

Ongoing low commodity prices are more likely to drop the value of the New Zealand dollar than lower interest rates, said First NZ Capital director Chris Green, who predicted the kiwi dollar would fall below 60 US cents. Gibbs thinks the kiwi dollar will go to as low as 50 US cents in the next two years and to around 72 Australian cents from just under 90 Australian cents now.

Most of the economists expected the US Federal Reserve will start hiking interest rates in December, after earlier expectations it would do so next month, amid signs of a faltering Chinese economy.

“We had the biggest sharemarket fall in 20 years in the US last Friday and China remains a risk," said Gibbs. "There is a lot of nervousness out there."

Zollner said quantitative easing was easier to get into than out of.

“The world economy has been on life support for the last six years. It’s alive but it’s not kicking. What happens when that stimulus is withdrawn? Can we crawl out of it? That’s the Fed plan but it’s not obvious we can.”

S&P chief global economist Paul Sheard said the US’s end to quantitative easing has been the most telegraphed move in central banking history and he expects a slow ascent after a move in December.

“I don’t expect this process will upset the global growth apple cart,” he said.

But what happens in China could really move the needle on global growth and he’s forecasting Chinese growth of around 6.5 percent there this year.

When asked about the Auckland housing bubble, Sheard said any housing bubble will eventually burst. The trigger is usually an interest rate adjustment but policymakers have learnt from past mistakes and the new macro-prudential tools mean monetary policy is no longer the only tool.

He said was surprised the government hasn’t tracked foreign buyers in the Auckland market, given the emerging middle class in China and reforms that are allowing them to shift more of their money out of the country.

“You see this in New York, London and Sydney where it is natural for them to hedge their risk and buy into an attractive market. It’s easier to state the problem than it is to fix it,” he said.

CoreLogic research director Jonno Ingerson said the heat in the Auckland property market was likely to continue, given not enough new housing is being built to meet demand and the growing population. Despite a big rise in consents, some developers were not building because they were struggling to make money out of it.

He said although property prices in Auckland have risen 18 percent in the past year, a Chinese buyer paying in their own currency would be paying 10 percent less year on year.

“That makes property in Auckland pretty attractive for people not spending New Zealand dollars.”

But Ingerson doesn’t think foreign buyers are a massive part of the market, with price increases fuelling speculation by local owners who “now have choices the rest of New Zealand don’t”.

He said the Reserve’s Bank new macro-prudential tools, or government plans to enforce a capital gains tax on investors who sell within two years, will have only a temporary impact, if any, on the Auckland market. Nor will lower interest rates “put another log on the fire because the fire is already raging.”

The only two things likely to dampen demand were more supply and a major drop in confidence about the economic outlook, he said.

“What will happen to drive the Auckland market down will have to be something spectacular,” he said.

BusinessDesk.co.nz

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