A slippery slope?

As New Zealanders drag their feet out of the sand and plant them firmly back under their desks last week, it is time to take stock of goings on. Over the holiday period, two big changes have stood out. Firstly, oil prices have fallen to levels not seen for 13 years. Secondly (and not unrelatedly) equity markets around the world have started the year with a serious case of the jitters. Neither is good news for New Zealand, though both developments lean in favour of our call that the OCR will head lower in 2016.

Oil prices have been sliding since mid-2015, but briefly plummeted below the $30/ barrel mark early in the New Year. The weakness has coincided with positive news on the supply front; shifts in the timing of the expected removal of embargoes on Iranian oil exports, robust US oil production, the refusal of OPEC nations to curtail their output, and high inventories. All of which have added to the downward pressure on prices.

However, our view is that falling oil prices can’t just be attributed to a lift in supply. Instead, they are also a symptom of renewed concerns about the global growth outlook (as evidenced by plunging global share prices). Front and centre are worries about the strength of the Chinese economy. A further slowdown in China will, undoubtedly, affect demand for all commodities, not just oil.

That’s bad news for New Zealand, and other commodity exporters. Already this year, we’ve seen dairy prices come under renewed pressure (whole milk powder prices fell 4.4% in the first GlobalDairyTrade auction of the year). Combined with the global backdrop described above, it’s not hard to see downside risks building not only to our 2015/16 farm gate milk price payout forecast of $4.50, but potentially beyond this. The backdrop is also likely to remain soggy for meat and forestry exporters.

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