NZ’s income shock is going to get worse

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By Leith van Onselen

The December quarter’s national accounts release for New Zealand, released earlier this month, revealed that New Zealand is beginning to undergo a similar national income shock to Australia as the price of its biggest export commodity – dairy – plummets on the back of slowing Chinese demand and a big ramp-up in supply.

According to Statistics New Zealand, per capita national disposable income (NDI) growth has turned negative, falling by a combined 0.9% over six quarters versus 1.2% growth in per capita GDP (see next chart).

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There looks to be further bad news on the horizon for New Zealanders with Reuters reporting that China has accumulated a large stockpile of powdered milk, thus sending “prices plunging” and leaving “farmers in the world’s top milk exporter, New Zealand, struggling to stay afloat and its agriculture-dependent economy facing risks”:

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New Zealand’s dairy sector was until recently the backbone of the economy, representing around 25 percent of exports, but in the past two years farmers have had NZ$7 billion ($4.74 billion) wiped off their collective revenue.

Today, around 85 percent of farms run at a loss, leaving them fighting to stave off bankruptcy and forced farm sales.

Farmers’ struggles pose a risk to economic growth, and banks exposed to the sector, but alongside the financial cost some fear a growing human toll: suicides as a result of the stress…

Debt in the sector has nearly tripled over the past decade and jumped 10 percent in the year to June 2015…

Since early 2014, dairy prices have fallen around 60 percent, in large part linked to weaker demand from China after it stockpiled milk powder, and with most analysts tipping milk prices to stay low for longer.

It was previously thought (including by me) that New Zealand’s trade prices were better placed that Australia’s vis the Chinese economy’s rebalancing away from fixed asset investment towards services and consumption. It was thought at the time that New Zealand dairy would likely benefit directly from China’s emerging middle class, whereas Australia’s commodity exports – primarily used for Chinese construction and energy generation – would be a net loser from China’s transition to a services-led economy.

Thus, we thought that national income in New Zealand could very well grow at a healthier rate over the medium to longer-term than in Australia.

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It’s probably fair now to conclude that this view was wrong.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.