The current account deficit narrowed over the year to March 2020, to $-8.4 billion (-2.7% of GDP) – see graph from ASB. This was expected especially as the fall in tourism was offset by the solid trade in goods. Tourist spending was down 8.3% whilst transport services declined by 9.4%. Travel spending overseas by New Zealander’s (imports) was down 9.7% for travel services and 5.1% for transport. The narrowing of the deficit often coincides with a downturn in the economy as there is weaker domestic demand for foreign products and services by consumers and the business sector. Covid-19 has magnified the downturn and there is more pain to come for the domestic economy. Below are some notes on the Balance of Payments which is part of NCEA Level 2 and CIE AS/A2 courses
Balance of Payments consists of 3 accounts – Current Account, Capital Account and Financial Account:
1. Current Account – this consist of 4 accounts:
Trade in Goods – also know as visibles. E.G. Manufactured goods, Semi-finished goods, energy products, raw material, consumer goods and capital goods. The difference between visible exports (+) and imports (-) is sometimes known as the ‘Balance of Trade’.
Trade in Services – Invisibles. E.G. Tourism, Banking, Shipping and Transport, Education, etc. The difference between invisible exports (+) and imports (-) is Balance on Services.
Net Income – measures two main flows of income into and out of NZ: the compensation of employess – wages and salaries and investment income – Interest Profits and Dividends coming into NZ from NZ assets owned overseas matched against the outflow of profits and other income from foreign owned assets located within NZ.
Net current transfers – relates to transfers of money between countries by central government and other economic agents. E.G. Germany is a net contributor to European Union (EU) Institutions. Other items include foreign aid, military grants and money transfers.
2. Capital Account – this account is of minor consequence relative to the NZ Balance of Payments as a whole. The transactions recorded here involve transfers of ownership of fixed assets and also migrants transfers. Funds brought into NZ by new immigrants are recorded as capital account credits, whilst any funds sent by NZ residents who are emigrating to other countries are debits in the capital account.
3. Financial Account – there are 2 main components of this account:
Direct Investment Flows – relates to FDI – Foreign Direct Investment. E.G. if Toyota invest money in a car plant in NZ this would be an inflow of direct investment. Similarly, when Carter Holt Harvey invest money overseas this will result in an outflow of direct investment from NZ.
Portfolio Investment Flows – consider the sale and purchase of NZ shares and government securities. E.G. when an overseas investor buys shares on the NZ stock market, there will be an inflow of portfolio investment. When overseas investor sell shares or securities, there is an outflow.
Balance of Payments and Current Account
In theory the BOP should always balance. The sum of the current account, capital account and financial account balances should be zero. In reality however, this is never the case as it is impossible to record accurately every single transaction that takes place. An additional item known as net errors or omissions, or balancing item, is added to the BOP to ensure that the accounts balance. You can see below that a further $2,600m is required to make the accounts balance – this is referred to as “Net errors and omissions”
Tourism accounts for approximately 10% of GDP but the forecast doesn’t look good even with the success of eliminating Covid-19. NZ growth totalled $40.9bn last year of which $16.2bn – 5.8% GDP – came from tourism – see graph below. Tourism also helped the retail and hospitality sectors to the tune of $11.2bn – 4% GDP. But there are a number industries which have been hit hard by the lack of tourism due to Covid-19. The food and beverage industry relies on tourism and it accounts for 24% of the total food and beverage serving services.
Of visitors to New Zealand the three main ones are:
Australia – 23%
Rest of Asia – 13%
New Zealand is more exposed to tourism than a lot of other countries; we rely more heavily on this sector for employment, income and GDP. In 2019, 229,566 people were directly employed in tourism (8.4% of the labour force). This is a significant portion of the labour market and is considerably higher than many other countries. It has estimated that 100,000 jobs could be lost in the tourism sector as a result COVID-19 – that is 40% of those employed in the sector. On 22nd April 2020 visitor numbers fell to zero – see graph below – as a result of the border closures. However the lockdown has given the tourism sector the chance to restructure the sector into a more sustainable model and be less reliant on overseas visitors. But the future is very fragile.
Arrivals to New Zealand
Source: ANZ Research – New Zealand Weekly Focus – 25th May 2020
ASB bank published some of its forecasting for the Global and New Zealand economies and number of potential routes – read the full article here. They have come up with a central scenario which focuses on what is actually happening at the moment although we know how things can change. They then do an upside and a downside around this central forecast. They also published some graphs that relate to their scenarios – see below.
The ASB also noted that compared to other countries New Zealand is currently in a good position:
The economy is going into a deep but short-lived contraction – the economy will recover.
NZ has more fiscal and monetary ammunition than other countries.
Where the economy actual ends up – how long is a piece of string? Stay safe.
With countries around the world imposing a lock down for its population the global economy is entering a recessionary phase. Levels of unemployment not seen since the Great Depression of the 1930’s are anticipated – in the US 10 million people now looking for unemployment benefit. With this level of unemployment the demand side of the economy takes a hit and consumers who are worried about job security ‘batten down the hatches’ and start to be a lot more conservative with their spending – only essential items. One significant advantage for New Zealand is the fact that we have large primary sector which allows us not only to feed the population but also export – Fonterra exports 95% of local production to 140 countries. The panic buying that was seen in supermarkets around the country led to a government advertising campaign saying that we have plenty of food (and toilet roll) so no need to stockpile necessities. However this panic buying seems to have eased off and although doing the shop at the supermarket maybe slower than normal, people are getting their food okay – Good Friday tomorrow sees the supermarkets shut so they can restock.
On world markets New Zealand’s major primary export product prices have been declining as a percentage (see graph above) but what is encouraging is that this decline has been from a strong position which is unlike those in other sectors of the global economy. Meat and dairy sales surged prior to coronavirus with sales values rose 7.4% ($649 million), to $9.5 billion in the 2019 December quarter. On the contrary stock markets around the world have taken a significant hit with some declining over 20% but also coming from much weaker positions.
Other factors that help the primary sector
NZ dollar The 11% decline in the NZD/USD exchange rate gives the primary industry some protection against the fall in global food prices. Remember a decline in the value of the NZD makes our exports cheaper.
Oil prices The cheaper oil prices have been passed on at the pump and this has reduced costs for the primary sector.
Inelastic good Food is a necessity good as people need to eat – i.e. very inelastic. Therefore food related products are expected to holdup better than most. Even in the worst of downturns there will still be demand for food.
Restaurants, bars and cafes
With the closure of eating establishments during the lock down the profile of global food demand has changed as people buy more provisions from the supermarket. This has meant that supply chains have had to adjust and reallocate resources to online etc. When the country comes out of the lock down there is a supply issue for firms to get up and running again but let’s not forget the demand side. Will consumer behaviour have changed? Will people still want to go to restaurants and bars as before? One interesting statistic to lookout for will be the activity in these areas.
Not all rosey Even though the points above suggest that things might not be too bad for the primary sector, one has to be aware of the recent drought conditions in the North Island and parts of the South Island which were classified as a large-scale adverse event by Agriculture Minister Damien O’Connor. Also with Covid-19 and border restrictions there are labour shortages in some industries with up to two-thirds of the workforce coming from overseas, half on Recognised Seasonal Employer (RSE) visas and half backpackers. Further concerns are the transport links into Asia for exports as the airline industry cuts back on international schedules. Important to remember that the vast majority of commercial flights carry cargo.
All that being said I think we are quite lucky to be in New Zealand.
Statistics New Zealand produced a great interactive graphic showing which industries have contributed to New Zealand’s GDP. It takes the top 10 industries that contributed most to the production measure of gross domestic product (GDP) in a given year. Industries are coloured based on four broad industry groups:
Goods-producing industries: manufacturing; electricity, gas, water, and waste services; and construction industries.
Primary industries: agriculture, forestry, fishing, and mining industries.
Service industries: wholesale trade; accommodation and food services; retail trade; transport, postal, and warehousing; information, media, and telecommunications; finance and insurance services; rental, hiring, and real estate services; professional, scientific, technical, and admin support services; government administration; health; education; and other service industries.
Taxes on production: includes GST, import duties, and stamp duties.
Below the doughnuts show the changes from 1973 to 2018.
Things to note:
The contribution from the goods sector has fallen from 33% to 19%
The service sector has increased from 51% to 65% over the period
The primary sector has halved over the period from 14% to 7% – agriculture was the biggest industry in 1972 at 11.2 but by 2018 this figure was 4.3% and the industry was relegated to10th in 2018
Click here to go the interactive – well worth a look and great for Macro at NCEA Level 2 and 3.
I have blogged quite a few times about the ‘Resource Curse’ but what about the ‘Trade Partner Curse’? New Zealand has been renowned for its primary exports but is it a concern that a third of every dollar earned in the primary sector comes from China. Dr Robert Hamlin (University of Otago) stated that based on experience no more than 20% of revenue should be earned from one source to ensure a buffer against changes in terms of trade and the economic conditions in the favoured country of destination.
Higher Terms of Trade – would be beneficial because the country needs fewer exports to buy a given number of imports. Lower Terms of Trade – country must export a greater number of units to purchase the same number of imports.
New Zealand which is traditionally dependant on primary exports usually faces instability which arises from inelastic and unstable global demand especially from China. By relying on the Chinese market, New Zealand exposes itself to greater risk of recessions in that market which may reduce in the demand for New Zealand products. Having numerous export markets means that there isn’t such exposure to economic volatility. Furthermore, countries that are commodity dependent or have a narrow export basket usually faces export instability which arises from inelastic and unstable global demand. The 2018-19 Ministry for Primary Industries’ Situation and Outlook report stated that from the year to June 2019 – total primary exports = $46.3bn but when you look at the breakdown from which country you get the worrying sign that more trade is going to China and less to other countries – essentially China is crowding out other markets:
China – $14.4bn Australia – $4.5bn USA – $4.2bn EU – $3.1bn Japan – $2.6bn
In 2017 China accounted for 24% of all New Zealand’s trade exports (see above). China also was the top export destination for New Zealand primary sector – 24% of primary sector exports went to China – by value: 25% of dairy, 43% of forestry, 31% of seafood and 21% of red meat.
China is taking a long-term approach to secure food supplies for its growing population by also buying NZ processing companies, giving it control of the supply chain. The reliance on China comes with risks that its economy remains strong. A downturn in their economy could have implications for New Zealand’s primary sector so it is important to have a diversified portfolio.
New Zealand’s annual current account deficit totalled
$10.6 billion in the year ended March 2019, up from
$8.5 billion a year earlier. As a proportion of GDP, the
current account deficit was equivalent to 3.6 percent in
the year ended March 2019.
For the NZ Economy the persistent trade deficit has a number of potential causes both short and long term:
High propensity to buy imported goods and services – there is a tendency for NZ consumers to prefer foreign produced output and in a consumer boom we often see an acceleration in the volume of imports coming into the country
Lack of productive capacity of NZ firms – if home producers have insufficient capacity to meet demand from consumers then imports will come in to satisfy the excess demand
Poor price and non-price competitiveness of NZ firms – Cost levels and NZ prices relative to international competitors can measure competitiveness, but non-price factors are also important. These include quality, design, reliability and after-sales service
Declining comparative advantage in many areas – the advantages that countries have in producing certain goods and services change over time as technology alters and other countries exploit their economic resources and develop competing industries. NZ manufacturing industry has suffered over the years from low cost production in newly Industrialising countries and from other parts of Asia.
An over valued exchange rate – Some economists suggest that trade problems stem from the exchange rate being at too high a level. This causes NZ export prices to be higher in foreign markets whilst imports into the NZ become relatively cheaper.
The strength of the NZ$ over recent years has made life difficult for NZ exporters in overseas markets. This is because a rise in the value of NZ$ leads to a rise in the foreign price of NZ exported goods and services. When NZ prices are higher, foreign consumers are less likely to buy our products. The high exchange rate also makes imported goods cheaper inside the NZ. This leads to a rise in the volume of imports and a fall in the share of the NZ market taken up by goods and services from overseas
The Department of Statistics recently published wealth distribution figures for New Zealand. According to Stats NZ, the median household net worth in the year ended 30 June 2018 was $340,000, up from $289,000 in 2015. The increase was mainly driven by an increase in property values over the last three years.
% of net wealth held by % of Households – 2018
According to the survey, the top ten percent of households hold 53 percent of total wealth in New Zealand, which is unchanged from 2015. The top one percent of households hold 16 percent of total wealth in New Zealand, which is down slightly from 2015. New Zealand’s Gini Coefficient is approximately 0.33.
The Lorenz Curve
The Gini Coefficient is derived from the same information used to create a Lorenz Curve. The co-efficient indicates the gap between two percentages: the percentage of population, and the percentage of income received by each percentage of the population. In order to calculate this you divide the area between the Lorenz Curve and the 45° line by the total area below the 45° line eg. Area between the Lorenz Curve and the 45° line ÷ Total area below the 45° line.
The resulting number ranges between:
0 = perfect equality where say, 1% of the population = 1% of income, and
1 = maximum inequality where all the income of the economy is acquired by a single recipient.
* The straight line (45° line) shows absolute equality of income. That is, 10% of the households earn 10% of income, 50% of households earn 50% of income.
In 2010 China’s Gini coefficient was 0.61 which was one of the world’s most unequal countries however officially it has been falling for seven years from 0.49 in 2008 to 0.46 in 2015. Rural incomes have grown more quickly that their urban counterparts – in 2009 the average urban income was 3.3 times that of a rural worker but now it is 2.7 times. Many of those living in rural areas actually work in cities but are prevented from living there because of the strict residency system. Also companies have now been looking to the rural areas for cheap labour.
But at the top end you would get the impression that inequality of wealth is extremely high – wealth = what you own, as opposed to what you earn. China has more dollar billionaires (596) than the USA (537). Research has shown that 1% of the population control a 1/3 of China’s assets.
Whilst there has been a lot of talk about Auckland’s flattening house prices the city is ranked only behind Hong Kong (94.1%) as the most unaffordable city in the Economist’s ‘cities house price index’ – house prices in Auckland are 73.8% overvalued compared to the average income. This figure is ahead of Sydney, Amsterdam, London, New York, Paris and Vancouver – see graph from The Economist – showing how housing is basically unaffordable in proportion to earnings.
There are 3 reasons why house prices globally have been accelerating at such a high rate – Demand, Supply and the cost of borrowing.
Regional population growth in Auckland has been significant and although is slowing it still has the fastest population growth in NZ. With the influx of people and the housing construction more jobs become available which in turn attracts workers from other areas. Furthermore foreign investors have played their part in increasing demand although this has reduced over the last year with the government putting in place regulations with home ownership.
Housing has become particularly scarce with supply unable to keep up with demand. But recent consent figures for 2018 show that 13,000 were issued in Auckland compared to 10,000 in 2017. Auckland was previously building too few houses relative to population growth, leading to a worsening housing shortage as indicated by a rise in the estimated number of people per dwelling.
Low interest rates
Since the GFC economics has been dominated by fiscal and monetary policies to stimulate aggregate demand. Tax cuts have added to consumers bank balances but it is monetary policy that has been particularly prevalent with record low interest rates encouraging consumers to borrow money and buy property. Furthermore with the stock market becoming a fickle location for investment investors sought the so-called safety of the housing market and in many cities did particularly well.
But prices are starting to level off and in some cities falling in a response to variety of reasons – rising yield on treasury bonds – tighter regulations on overseas buyers – uncertainty about Brexit – China tightening up on capital outflows of the super-rich.
Source: The Economist – Buttonwood – November 10th 2018
The impact of Brexit on New Zealand depends on what kind of exit agreements are reached between the UK and the European Union. The published provisional deal includes a transition period which runs until the end of 2020. During this time, existing trade conditions for third parties (such as New Zealand) will continue. Below are tables showing the trade relationship between New Zealand and both the EU and the UK. The benefits of two way trade with the EU outweigh those of the UK – US$23,273m against that of the US$5,640m
March 2018 – New Zealand’s total trade balance was a surplus of $4.0 billion in the year – this surplus is up $1.3 billion from the trade surplus in the year ended March 2017.
Total exports of goods and services were $78.0 billion, while total imports were $73.9 billion.
China ($15.3 billion) and Australia ($13.9 billion) were the top export destinations.
The European Union ($13.4 billion) and Australia ($12.1 billion) were the top import sources.
Dairy products and logs to China were New Zealand’s top two export commodities by destination, earning $4.0 billion and $2.6 billion, respectively. This was followed closely by spending by visitors from the European Union ($2.2 billion) and Australia ($2.1 billion).
New Zealand’s negotiations
New Zealand is in negotiations with the UK over a FTA. According to New Zealand Foreign Affairs and Trade NZ wants the following from a FTA:
Removing tariffs and other barriers that restrict the free flow of goods between our two countries
Making it easier for traders of all sizes to do business in the UK, including services exporters Strengthening cooperation and dialogue with the UK in a variety of trade and economic fields
Reflecting our goals including progress on gender equality, indigenous rights, climate change, and improved environmental outcomes.
Some key areas in which we will be seeking even closer cooperation with the UK under the FTA include:
High quality primary sector and goods access to the UK’s market, such as for meat, mechanical machinery and equipment, fruit, pharmaceuticals, forestry, dairy and wine
Helpful conditions for investment and services providers who operate between the two countries
Commitments on progressive trade issues including environmental and labour protections, indigenous rights and gender equality.
Parliamentary Library Monthly Economic Review – December 2018.