New Zealand GDP growth slows down

Thu Lan Ngueyn, FX Strategist at Commerzbank AG, on New Zealand economy and Kiwi

Economists from HSBC mention while China's economy was slowing, along with many other Asian nations, the outlook for New Zealand was still strong. However, the GDP growth slows, dairy prices slump, business confidence slips, the dollar falls and Auckland's heated housing market continues to set records. Do you agree with the economists view? Do you consider this phase as a rebalancing process moving away from a commodity dependent economy?

Agriculture and mining are still very important drivers of economic growth in New Zealand. This has again been highlighted by the unexpected slowdown of GDP growth in the first quarter, which was mainly driven by lower milk production and decreased exploration activity and oil and gas extraction. However, we are seeing signs that indeed rebalancing is taking place.

Domestic demand is strong-fueled by net immigration and construction activity remains robust as well. Combined with an expansionary monetary policy and a weak NZD, economic growth in New Zealand should remain respectable. Following real GDP growth of 3.3% in 2014 we expect another rise of approximately 2.5% this year. Despite the negative impact of the weak commodity sector, New Zealand should remain amongst the top set of the industrialized economies.

The RBNZ cut interest rates for the second time in six weeks and said further easing will likely be needed to stoke inflation as growth slows. Moreover, economists predict the Bank will return the benchmark to a record low of 2.5 % this year, while Wheeler expects inflation of “close to” 2 % early next year. Do you think Wheeler will change his mind if oil or dairy prices rebound?

I believe the development on the commodity markets is an important factor for the Reserve Bank of New Zealand’s policy decisions; however, it is not the only one. For a small and open economy such as the one in New Zealand, the exchange rate plays a crucial role. If the rebound in oil and dairy prices is countered by a significant appreciation of the Kiwi, the RBNZ is likely to still be inclined to cut its key rate further.

Falling commodity prices had weakened the New Zealand Dollar, alleviating pressure for a lot of exporting New Zealand small businesses and manufacturers. What other factors could determine the behavior of the Kiwi until the end of the year?

One important driver will be the normalization of monetary policy in the US. If the Federal Reserve starts to lift rates (as soon as September) the Greenback will appreciate against the NZD without the RBNZ having to become active. Not least due to this reason, we expect the Reserve Bank of New Zealand to only cut its cash rate once more by 25 bps to then 2.75%, instead of 2.50%, as some market participants may assume. Combined with the interest rate hike by the Fed, this will suffice to keep a lid on the NZD/USD.

What are your forecasts for NZD/USD, EUR/NZD and AUD/NZD for Q3 and the end of 2015?

We expect to see the NZD/USD at 0.64 in the end of Q3 and our forecast is 0.63 for the end of the year. As concerns the EUR/NZD, we see the pair trading at 1.66 levels in the third quarter and 1.65 in Q4. Finally, we anticipate the AUD/NZD to reach 1.16 in Q3 and stay at the same level in the end of 2015.