Stormy weather

Local developments largely took a back seat last week to the unfolding dramas of China’s share price plunge and Greece’s potential exit from the euro zone. While a sense of calm was starting to return by the end of the week, both situations remain fluid, and the consequences for New Zealand of a more serious turn of events are uncertain.

The China story in particular is cause for concern for New Zealand, as a major exporter of primary products to Chinese consumers. Of course, at times like this, financial prices tend to be pushed around by the need to liquidate positions, rather than any view on their fundamentals. That can sometimes lead to perverse outcomes – such as the New Zealand dollar actually finishing the week higher, reflecting the extent of short positioning in the currency in recent times. Nevertheless, it’s clear that the market views China’s woes as a poor backdrop for New Zealand’s commodity exports – dairy futures are implying another steep fall in prices at this week’s Global Dairy Trade auction.

Last week’s data continued the recent theme of slowing momentum in the New Zealand economy. The June Quarterly Survey of Business Opinion showed that a net 7% of businesses expect conditions to improve over the coming six months. That’s down from March’s 20% result, and well below the results seen over the past year.
In fact, business confidence hasn’t been this low since 2012. That theme continued throughout the survey, with businesses reporting slowing activity, reduced hiring and investment plans, and little in the way of increasing prices or margins.

The results were varied across sectors. On the positive side, the building industry appears to be powering ahead (much more so than was suggested by the monthly ANZ business survey). While building consents have flattened out in the last year, there is a significant amount of work still in the pipeline, for both the Christchurch rebuild and the rest of the country. Manufacturers were concerned about the wider outlook, but were more upbeat about their own performance. Notably, these two sectors reported that capacity utilisation was at its highest in the history of the survey going back to 1961, which stands in contrast with the evidence elsewhere of a lack of inflation pressures.