Tag Archives: New Zealand

OECD – GDP per capita – New Zealand falls to 22nd.

New Zealand has enjoyed a high standard of living and solid economic growth in recent years. However, during this period New Zealand has also exhibited a comparatively low level of productivity growth relative to our OECD peers. Broad-based evidence of this can be seen in New Zealand’s Gross Domestic Product (“GDP”) per capita. This metric measures output per New Zealander and is standardised into US Dollars for all countries. On this metric, New Zealand has consistently trailed the United States, Australia, Canada, Great Britain, France, Japan and the OECD average.

In 2017, New Zealand was ranked 22 of 48 countries surveyed by the OECD, compared with 9th place in 1970 and 20th in 1993. Over the last 50 years the world has seen much stronger growth in exports of manufactured products and slower growth in exports of primary products. And New Zealand’s competitive advantage is still in primary products. We are now on the brink of a technological revolution that will alter the way we live and work. The fourth industrial revolution is all about embracing the digital revolution. Our low productivity levels are a bit of a conundrum and the reasons for this are varied and subjective. Source – ANZ Bank


Source: Organisation for Economic Co-operation and Development (“OECD”)

New Zealand’s Terms of Trade – Milk Powder v Oil

The recent history of New Zealand’s terms of trade has been largely linked to dairy product export prices although in a longer-term context the price of imported oil has been paramount. Today we can see that the price of powdered milk (export) and the price of brent crude oil (import) are heading in the wrong directions. Powdered milk prices are falling and brent crude oil prices are rising which makes for an unfavourable terms of trade – see graph. This is not a good sign for the terms of trade which reached its peak in March this year.

What is the Terms of Trade.
The terms of trade index measures the value of a unit of exports in terms of the number of imports it can buy, or the purchasing power of our exports. This is similar to comparing the number of sheep exports that will buy a typical imported family car, from one time to another. The formula is:
Formula: Terms of Trade (TOT) =

Export Price Index (Px)           x   1000 (base year)
Import Price Index (Pm)

  • An increase in the TOT (e.g. from 1050 to 1200) is called “favourable”
  • A decrease in the TOT (e.g. from 1050 to 970) is called “unfavourable”

A “favourable” (increase) in the TOT may come about because the average:

– export price rose and import price stayed the same
– export prices rose faster than import prices
– export prices stayed the same and import prices fell
– export prices fell but import prices fell faster

The index number that results tells us whether merchandise export price movements have been favourable relative to import price movements. An increase in the terms of trade from 1000 to 1100 represents an increase in the purchasing power of our exports of 10% which means, other things being equal, we would be able to buy 10% more from overseas. As a country we would be wealthier. A decline in the terms of trade would result in the opposite situation.

Limitations of the Terms of Trade

Terms of trade calculations do not tell us about the volume of the countries’ exports, only relative changes between countries. To understand how a country’s social utility changes, it is necessary to consider changes in the volume of trade, changes in productivity and resource allocation, and changes in capital flows.

The price of exports from a country can be heavily influenced by the value of its currency, which can in turn be heavily influenced by the interest rate in that country. If the value of currency of a particular country is increased due to an increase in interest rate one can expect the terms of trade to improve. However this may not necessarily mean an improved standard of living for the country since an increase in the price of exports perceived by other nations will result in a lower volume of exports. As a result, exporters in the country may actually be struggling to sell their goods in the international market even though they are enjoying a (supposedly) high price. An example of this is the high export price suffered by New Zealand exporters since mid-2000 as a result of the historical mandate given to the Reserve Bank of New Zealand to control inflation.

In the real world of over 200 nations trading hundreds of thousands of products, terms of trade calculations can get very complex. Thus, the possibility of errors is significant.


  • A decline in the terms of trade is not necessarily a bad thing. For example, a decline in the terms of trade may occur due to a devaluation in the exchange rate. This devaluation may enable a country to regain competitiveness and increase the quantity of exports.
  • The impact of a decline in the terms of trade will depend on the elasticity of demand. If demand is elastic, the lower price of exports will cause a bigger % increase in demand.
  • Some Less Developed Countries (LDCs) have seen an improvement in terms of trade because of rising price of commodities and food post 2008. It is not always LDCs who see a decline in the terms of trade.
  • It is important to distinguish between a short term decline in terms of trade and a long term decline. A long term decline is more serious for reflecting a fall in living standards.

New Zealand keep triple A rating but what does it mean?

Moody’s credit rating agency continued with a Aaa rating of New Zealand’s economy. They expect the coalition government will remain committed to fiscal discipline, with the Budget staying in surplus. The high strength of New Zealand’s institutions was a key factor in underpinning the credit rating. There are three main rating agencies in the global economy – Standard & Poor’s, Moody’s and Fitch – below are the ratings that each company uses.

Conflict of Interest and the sub-prime crisis of 2008
Rating agencies are paid by the people whose products they grade and they are competing against other rating agencies for the business. Subsequently the rating agencies were being played-off against each other by the bankers in this market and this led to a systemic decline in standards and willingness not to check the underlying information as thoroughly as possible for fear of losing the deal. Even the rating agencies themselves admit mistakes were made is assessing sub-prime debt and that there were issues to do with data quality from their sources of research. However one has to consider whether the world have been better off if credit rating agencies had not existed as pension funds, bond funds, insurance companies etc would have had to do a lot more of their own research on what they were buying.

Remember before the credit crisis AAA investments mushroomed between 2000-2006 see graph below.

But consider the following:
Bear Stearns
– rated A2 a month before it went bankrupt
Lehman Brothers – rated A2 just days before it collapsed
AIG – rated AA within days of being bailed out
Fannie Mae & Freddie Mac – AAA rating before being bailed out by the government
Citigroup – A2 before receiving a bail out package from the Government
Merrill Lynch – A2 before being sold to Bank of America

A2 is considered a good investment grade


Global Dairy Prices down but why does NZ have such high milk prices?

On the 21st August the GDT Price Index continued its decline and dipped 3.6pc, with an average selling price of $3,044 per tonne. Whole milk powder was down 2.1% at $2,883 – see graph below:

How does the GDT work?

GlobalDairyTrade trading events are conducted as ascending-price clock auctions run over several bidding rounds.  In each auction a specified maximum quantity of each product is offered for sale at a pre-announced starting price. Bidders bid the quantity of each product that they wish to purchase at the announced price. If the price of a product increases between rounds, to ensure their desired quantity a bidder must bid their desired quantity at the new, higher price. Generally, as the price of a product increases, the quantity of bids received for that product decreases. The trading event runs over several rounds with the prices increasing round to round until the quantity of bids received for each product on offer matches the quantity on offer for the product (as shown in the diagram below). Each trading event typically lasts approximately 2 hours.

Why are prices so high in NZ?

Fonterra is responsible for 30% of the world’s dairy exports with revenue exceeding NZ$20 billion and is New Zealand’s largest company. With New Zealand being one of the biggest producers you would expect prices for New Zealand consumers to be lower than what they are – a litre of fresh milk in Germany was selling for the equivalent of $1.51, compared to $2.37 in New Zealand.

Milk being inelastic in demand and is an essential part of the typical family shopping basket. Up until 1976 the price of milk was set by the government and producers were subsidised the loss that they incurred by a set price. The subsidy was completely removed in 1985 and by 1993, milk could be sold at any price. In January 1994, two litres was selling for the modern equivalent of $3.95. Consumer NZ estimates that for every $3.56 bottle of milk (an average retail price at present), about $1.19 would go to the farmer, $1.91 to the processor and retailer and 46c to GST.

Who gets what?

Because Fonterra take over 80% of what farmers produce it is difficult for the market to decide what an appropriate price to pay farmers. Therefore they work out what they believe is the highest sustainable price it can pay its farmers. It looks at the global dairy trade auction price and operating costs and capital costs to determine the farm gate price.

GDT price – Operating Costs – Capital Costs = Farm Gate Price

So farmers in New Zealand are at the mercy of the global market not how much is demanded in NZ supermarkets.

NZ Supermarket Prices

Supermarkets buy their milk from local distributors, either direct from Fonterra or other processors such as Synlait, or from suppliers who had value along the way. They then add their own costs to give a final price to the consumer but New Zealand food retailing effectively is a duopoly. Milk in Germany is much lower in price because of the high levels of competition with multiple chains operating there. In New Zealand however the price consumers pay reflects the concentrated nature of the market. Domestic milk market is dominated by one big supplier, Fonterra (see graph below), and two big supermarket chains – Foodstuffs and Progressive Enterprises – which means there’s little competition for your dairy dollar.

Global Debt – 225% of GDP

The New Zealand Parliamentary Library publish a very good monthly economic review and in the July edition the topic of the month was The International Monetary Fund’s Global Debt Database.

The IMF publish their Global Debt Database which provides the gross debt levels since 1950 for 190 advanced economies, emerging market economies and low-income countries. It covers 99% of global GDP in 2016. Currently, total debt levels have reached a new high, standing at around US$164 trillion, or 225% of global GDP with USA, China and Japan accounting for more than half this figure – $92trn out of $164trn – see table.

The big change is China with debt having gone from $5trn to $26trn in the space of 10 years – this equates to 3% of global debt in 2007 to 15% in 2016. Private debt has nearly tripled since 1950.

Government vs Private Debt in New Zealand

New Zealand government debt has been on its way down which is in contrast to its private debt – see figures and graph below. Not surprisingly the IMF is concerned about private debt and the effects of the country’s inflated housing market despite the strong economic outlook. They said “Household debt remains high under the baseline outlook and would amplify the impact of large downside shocks, notwithstanding recent improvements in its risk structure after macroprudential policy intervention. Such shocks could also trigger a disruptive housing market correction,” The main risks to New Zealand are an economic slowdown amongst developed countries and China, the fallout from increasing protectionism and the Mycoplasma bovis cow disease.

Source: New Zealand Parliamentary Library – Monthly Economic Review – July 2018

Dairy debts make NZ Banks vulnerable

New Zealand dairy farmers are making banks worried about their ability to keep up with their mortgage payments. Four recent issues haven’t helped the cause:

1. Falling produce prices making it harder for farms to service debt
2. Mycoplasma bovis cutting productivity and profitability of the sector
3. Regulatory changes  – restrictions on foreign ownership and therefore reducing the value of dairy farms
4. Environmental regulations – increasing operating costs for farms

Whilst the last two might improve the long-term sustainability of the dairy sector they could reduce the profitability of highly indebted farms and their equity buffers.

Banks are closely monitoring about 20% of their dairy farm loans because of concerns about the borrowers’ financial strength. Although a dairy downturn is unlikely to threaten the solvency of the banking system, it does weaken their position if there is another external shock like another GFC. Bank lending in the dairy sector has been consistent over the last few year years but the proportion of loans on principal and interest terms has increased from 6% in January 2017 to 12% in March this year.

Although the average mortgage for most farm types has decreased in dollar value over the past six months, the average mortgage amount increased in the dairy farms – see graph below. The average mortgage for dairy farms is the highest at $5.1 million for the first time since the survey began in August 2015.

The table below shows the average current mortgage by sector over the years shown. Dairy farmers continue to hold the largest proportion of mortgages in excess of $2 million. They are also more likely to have a mortgage over $2 million – 62.5% of all dairy farms – and $20 million – 3.4% of dairy farms.

Source: Federated Farmers of New Zealand – Banking Survey – May 2018

New Zealand’s regional and per capita GDP.

From the New Zealand Parliamentary Library – April 2018.

  • Auckland region has the largest regional GDP at $101,370 millionWellington region
  • ($35,603 million), and the Canterbury region ($34,933 million). Economic output in the North Island accounted for over 77 percent of total economic output in New Zeala
  • Old with the South Island providing the remaining 22.7 percent.
    The economy expanded by 6.2 percent over the year in nominal terms (not to be confused with real economic growth of 3.7 percent over the year). The Bay of Plenty region grew the most in percentage terms, expanding by nine percent in nominal ter
  • ms, followed by the Northland and Waikato regions (8.2 percent each). In contrast, the Wellington region expanded by 4.6 percent over the year.

The region with the highest GDP per capita was the Taranaki region ($70,863), followed by the Wellington region ($69,851), and the Auckland region ($61,924). The region with the lowest GDP per capita was the Gisborne region, at $39,896 for the year ended March 2017.
The following table shows nominal GDP, the annual percentage change, and GDP per capita for the year ended 31 March 2017 by region.

Source: New Zealand Parliamentary Library. April 2018



Benefits of CPTPP to New Zealand.

On 23 January 2018, in Tokyo, the negotiations for the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) were concluded. Its inception came from the TPP Agreement but that could not come into force until it was ratified by four other signatories, including the United States. After the election of Donald Trump the US made it clear that it did not intend to become a party to the Agreement. However the remaining eleven countries continued negotiations.

The eleven countries in the CPTPP are: Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.

The economies  account for 13.5 percent of world GDP – worth a total of US$10 trillion. These are economically significant for New Zealand. The 10 economies:

• Are the destination for 31 percent of New Zealand’s goods exports (NZ$15.2 billion) and 31 percent of New Zealand’s services exports (NZ$6.9 billion) annually (year to the end of June 2017).

• Include four of New Zealand’s top 10 trading partners (Australia, Japan, Singapore, and Malaysia).

• Include four countries with which New Zealand has never had a free trade agreement (Japan, Canada, Mexico and Peru). We export over NZ$5.5 billion of goods and services to these four countries.

• Are the source of 65 percent of total foreign direct investment in New Zealand (as of March 2017).

The CPTPP will provide significant benefits for New Zealand goods exporters across a range of sectors. Tariffs will be eliminated on all New Zealand’s exports to CPTPP economies, with the exception of beef into Japan; and a number of dairy products into Japan, Canada, and Mexico, where access will still be improved through partial tariff reductions and duty-free quotas.

Source: New Zealand Foreign Affairs and Trade.

New Zealand election: economic impact of new Government’s policies.

Since the election businesses seem to be unsure of the new direction of government policy and therefore this has led to a reduction in business confidence. This is not unusual especially with a change of political ideology and the more left leaning government which could make things – regulation, taxes etc – harder for businesses. The government plans to cancel next year’s scheduled tax cuts even though it would have added 0.4% to GDP. This could be partly offset by an increase in expenditure on Working For Families and the free tertiary education for first year students.

The new Government plans to spend more than the national government which is not unusual considering its position of the political spectrum – see graph. This will be partly funded by tax revenue and borrowing $7bn more over the next four years – this is a borrowing and spend fiscal stimulus. The impact of this spending will be influenced by the fiscal multiplier.

Fiscal Multiplier.
It refers to the change in GDP that is due to a change in government fiscal policy – taxes and spending. For example, if increased government spending of $1bn causes overall GDP to rise by $1.5bn, the multiplier effect is 1.5.

There are problems for the new Government in that:

1. Some of this extra spending will go on imports and this will mean an outflow of money from the New Zealand economy and therefore making no contribution to GDP. Remember that GDP expenditure approach = C+I+G+(X-M).

2. There is also the crowding out effect – this is when government spending fails to increase overall aggregate demand because higher government spending causes an equivalent fall in private sector spending and investment. This could include: extra spending on public healthcare leading to less spending on private healthcare; government employment creating labour shortages for firms; and government employment creating labour shortages for firms. Crowding out can also happen indirectly via fiscal stimulus increasing interest rates and consequently the exchange rate making exports less competitive and imports cheaper.

Ultimately the government debt must be repaid by the use of government revenue from taxation. A labour coalition government usually increase taxes during their time in government and this has the tendency to discourage private sector investment. The government’s borrow-and-spend plans will not necessarily make the economy any larger in the long-run but it is expected that government spending (G) will be a larger share of the economy with consumption (C) and investment (I) having a lower share – see graph below. Interesting to note the government spending as a % of GDP for Labour and National – goes up as a % of GDP when Labour are in office and goes down as a % of GDP when National are in office.

Source: Westpac Quarterly Economic Overview – November 2017

Government debt as % of GDP – New Zealand amongst the lowest in the OECD.

In 2015 New Zealand’s government debt as a % of GDP was amongst the lowest amongst the OECD countries coming in at 35.6% – NZ$86.1bn. This gives the government the ability to borrow billions of dollars to stimulate growth in the economy and fund necessary infrastructure projects. This is important when a recession phase is threatening the economy. In 2015 the median level of debt to GDP was the Netherlands with 77.5% and Australia was 67.7%. The UK and the USA had debt to GDP of 112.6% and 125.9%. The standout countries are Japan with debt of 234% of GDP and Greece at 182%. High amounts of debts are only become a concern when the debt is mainly funded from overseas and issues in non-local currency and the country is unable to alter its exchange rates. For Japan a lot of the debt has been issued internally and been bought by the Bank of Japan (central bank) but this is not the case for Greece as they have had significant help from other countries.

Govt debt as % GDP

Does aggressive or cautious fiscal stimulus lead to higher debt-to-GDP ratio?

With low interest rates globally and liquidity trap conditions a more expansionary fiscal policy has become more prevalent for most governments. However the level of severity of fiscal policy – aggressive fiscal stimulus v cautious fiscal stimulus – is important with regard to a country’s debt-to-GDP ratio as recent experience shows. A paper by Alan Auerbach and Purity Gorodnichenko of University of California Berkeley found that short bursts of expansionary fiscal stimulus doesn’t necessarily lead to higher debt-to-GDP ratios or to higher interest rates. They noted that in some instances markets revised down their worries about creditworthiness in response to large scale stimulus.

Other research by Brad De-Long University of California Berkeley and Larry Summers Harvard University seems to support this view. Their research suggests that long periods of cautious growth eat away at an economy’s productive potential as investments don’t get finished and healthy workers drop out of the labor force.

In future the level of stimulus and its time periods should be automatic and proportionate to the severity of the downturn. Examples could include:

  • Labour tax rates could be linked to unemployment figures so that pay packets jump the moment conditions deteriorate.
  • Funding to local governments could be similarly conditioned, to limit painful cutbacks by municipalities.
  • To prevent a scramble for worthwhile, shovel-ready infrastructure projects, governments could make sure to have a ready queue, so spending could easily scale up in a downturn.


  • The Economist – The Borrowers – 9th September 2017
  • BERL: New Zealand among lowest government debts in OECD – 26th September 2017