NZ’s economic omen for Oz

By Leith van Onselen

Please find below an interesting economics research note from the Bank of New Zealand (BNZ) on the growing economic imbalances developing in the New Zealand economy, which is encapsulated by the -11% fall in exports over the past year and the 33% increase in home sales. The note provides a stark warning of the situation facing  Australia should commodities exports continue to fall, the Australian dollar fail to depreciate, and the housing sector pick-up significantly.

Below are the key extracts from the BNZ note:

[New Zealand’s]… external accounts are deteriorating… October exports were 10.9% lower than a year ago. This is fundamentally a result of lower international prices for NZ’s exports, with weakness amplified by a rising NZ dollar…

Meanwhile, October import values were up 1.7% on a year ago. The increase was driven by capital and consumption goods, with intermediate goods lower than a year ago…

These estimates fit with other indicators that suggest the second half of 2012 will see slower GDP growth than the first half…

Likewise, we maintain our view that the current account deficit will widen to 5.5% of GDP in calendar 2012, from the 4.9% it reached in the year to June 2012. We see further deterioration ahead with the current account deficit expected to pierce through 6% during 2013.

Part of this view reflects weaker export volumes following the past year’s pastoral driven strength and limited price gains in the face of ongoing strength in the NZ dollar. The view also reflects some import growth on the back of expected economic growth and improving domestic conditions including what we have already seen in the property market.

We continue to wonder how wide the external deficits have to get before the market takes note, likewise the rating agencies. The stark contrast between the 11% decline in export values over the past year and the 33% lift in house sales provide a vivid illustration of the current imbalances.

Cue broken record: beware the deteriorating external accounts.

Twitter: Leith van Onselen. Leith is the Chief Economist of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. Click for a free 21 day trial.
NZ External Imbalances Revealed

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  1. Australia has had the benefit of observing the failures of other developed nations’ economies over the last 5 years. For heavens sake, wake up and take notice; do something and don’t let it happen to you! Have a look at us in NZ, on your doorstep, for an immediate reminder of what happens to an economy when the property market escapes, and renders the real economy impotent. Why am I so concerned about Australia’s economic well being? Because we have now become totally reliant upon you; your banks, your economy, your exchange rate and your employment market for the future of New Zealand.

    • …and there’s really only one answer for NZ now, push up interest rates ! I know it’s seen as heresy, when the domestic economy is so weak. But what will lower interest rates now do? Nothing, except the obvious….and if NZ pushes it’s interest rates up, having rammed them down a long time before Australia, what will the market make of the future for the Aussie cash rate, if we start the process of lifting rates? Yup. Yours will be pushed up regardless of whether you want that or not. Get ready for a steepening of the yield curve on both sides of the Tasman.

      • The RBA hasn’t got the spine to raise rates!

        With a total debt-to-GDP ratio at around 155 per cent, they are afraid any uptick in interest rates would increase defaults and put Megabank at even more risk than they already are… in turn putting even more downgrade pressure on Australia’s AAA rating! The Fed Gov has already started austerity measures looking for ways to keep ratings agencies happy!

        There isn’t the political balls outside of Iceland to quit kicking the can and deal with it!

    • I took the whole family for an extended holiday in NZ from July till Oct 2012 because I wanted to understand if NZ was a better option for buying / building a business.

      First off let me apologize in advance for any offense because I do love NZ.

      To be honest the high cost of Auckland’s RE was not a major factor in my decision not to locate in NZ, although indirectly it definitely played a role wrt increasing the cost of living for all employees.

      The factors that really shaped my decision to return to Oz were
      – limited higher educational opportunities outside of Auckland (read as I’m convinced that a fantastic education is the ONLY thing that I can really give my kids)

      – Extreme shortage of skilled trades people (most locals attribute this to the big Aussie mines and FIFO workers, I doubt that this changed the absolute numbers much but I’m certain that at the margin it shaped the tradies labor market)

      – I felt that any business established in NZ would very quickly out grow the home market, meaning that exporting had to be a crucial part of the initial business plan. Unfortunately locating in NZ only adds 5 plus hours each way to most business trips, which definitely dampens my desire to visit customers.

      – Insane telecommunications prices, NZ gov’t needs to address this problem urgently (this is particularly a problem wrt mobile phone calls because incoming calls cost the caller a minimum of 33c/min. this is insane because the cell phone is an essential tool of modern business especially international business.

      – there is a certain entitlement attitude that is the NZ equal to the Aussie “you need to be fair dinkum”. I got this a couple of times when I shared my takeover business plans with existing owners and union leaders. they shared the origins of their obscure and very inefficient work practices, as if the history of this inefficiency somehow justified its existence.

      – I’ve found that both Aussie and NZ businessmen are in love with the size of their organizations. Frankly I’d much rather run a $10M business with 50%CAGR than a $100M business in slow decline. So when I do DD on a bloated $100M businesses I want to carve out any growth opportunities and basically fire the rest. It might be heartless but it is the only way that I know to build a strong business core. NZ businessmen seemed to find it particularly offensive to be told that 90% of their company was useless fat.

  2. what??? you mean that buying and selling houses off each other isn’t a path to sustainable economic prosperity?????

    shhhhh dont tell the Aussies…

  3. reusachtigeMEMBER

    This is why I get angry about those on here moaning about the need for interest rate cuts. Raise them and fast!

    • Housing is a massively failing market. Interest rates need to go down, and housing needs to be fixed by government policy to go down as well.

      Problem is that thanks to years of stupidity and greed from the major parties we now so many people that have all their wealth tied up on housing that this freight train cannot be stopped.

      The idiot politicians have cornered themselves. The rest of us just need to find a trade that catches the fall-out.

      • How exactly will housing go down if interest rates are cut?

        If you want housing to go down, you need the government to increase supply. Look at what prices have done in Melbourne after a massive number of new dwellings hit the market.

        Another example is Auckland with its restriction on the development boundary of the city.

        Artificially high property has always been the fault of government either through interest rates or poor policy. Giving the government more power over economic policy will be a recipe for disaster.

        • The connection between interest rates and residential housing speculation needs to be broken – then rates can do what is necessary for the industrial economy.

          There isn’t a shortage of houses their is a surfeit of speculators/investors.

        • “Capitalist”, you are right.
          Greenspan era low interest rates made no difference to house prices in the 200 odd cities in the USA with no urban growth constraints, and Bernancke low interest rates are not doing so today. In these cities, low interest rates do actually stimulate economic activity. They actually enable houses of unchanged prices to be paid off faster, boosting discretionary income in the economy for years to come.

          I am not sure whether I agree with everything AJ says, but this is dead right:

          “…….Problem is that thanks to years of stupidity and greed from the major parties we now so many people that have all their wealth tied up in housing that this freight train cannot be stopped……”

          And the bigger the freight train, the bigger the mess ultimately. Economic competitiveness is undermined, productivity is undermined, discretionary spending is undermined, ultimately the economy strangles itself because the engine of the whole thing, is the CREATION of wealth, not zero-sum transfers that benefit luckily placed people.

  4. Good Brian Gaynor link, Jason. Of course, I agree with “.. showing signs of a bubble at present…is the New Zealand residential property market. A decline in the highly leveraged domestic residential property would have a much greater impact on wealth than the 1987 sharemarket crash or the finance company debacle; for example, a 10 per cent fall in New Zealand house prices would wipe out over $60 billion worth of individual wealth…Most investors don’t believe there will be a fall in domestic house prices just as they believed in the 1980s that the New Zealand share prices wouldn’t decline….That latter opinion was completely destroyed by the sharemarket meltdown…

    • Boy am I glad to see Brian Gaynor waking up, it is about time. I have been saying for a long time that property bubbles are far more damaging than share market crashes. Even the “great depression” of the 1930’s was far more affected by property price volatility than by share market volatility, and the entire economics profession has been decades completely missing the bus on the role of property cycles in the whole economy.
      There has never been such a period of sustained economic growth as 1950-2000 in most first world countries precisely because property prices were so stable for all of this time. The UK is a significant exception both with property prices and economic growth, proving the point. So, in a slightly different way, is Japan. The reason being the UK’s urban planning system, and Japan’s actual shortage of land.