The clouds darken

With global dairy prices still under pressure, mounting signs that the Canterbury rebuild is no longer an engine of growth, and business confidence dropping like a stone, the gloss has well and truly come off New Zealand’s near-term growth outlook.

Dairy prices dropped another 5.9% at last week’s Global Dairy Trade auction, taking the overall price index to a six-year low. This is a serious blow for the dairy industry, but it’s worth noting that much of the pain is sector-specific. Prices for New Zealand’s other main commodity exports in recent weeks have ranged from strong (beef and wool) to steady (lamb) to soft but improving (wood). So it’s not the case that soft commodity prices in general are under pressure. We suspect other factors specific to dairy are at play, such as the recent removal of European milk production quotas, signs of ongoing oversupply in the US, and the extension of Russia’s import ban.

Meanwhile, it’s increasingly clear that reconstruction activity in Canterbury is close to if not at a peak. The pipeline of residential building consents in Canterbury has already slowed, and while there is still plenty of work to do on the commercial side, these more complex projects are likely to be relatively more drawn-out.

Importantly, both these developments have percolated through to New Zealand consumer and business sentiment. While the latest drop in headline business confidence was particularly stark, businesses’ expectations for their own activity have fallen sharply for a second month in a row, with the decline concentrated among construction firms as well as farmers. This own-activity measure tends to be a leading indicator for GDP growth, and signals a slower economy through mid-2015. We have heard similar messages in our own conversations with businesses, and our own consumer confidence surveys are shown households feeling more pessimistic about both the economy and their own job and earning prospects.