New Zealand’s economic outlook stabilised in Q4 2019 after a plunge in business confidence earlier in the year due to US-China trade tensions.
Combined with a moderately optimistic tone from the RBNZ and our base case for modest weakness in the US dollar, this led us to take a bullish view on the Kiwi dollar in 2020 in our last global outlook.
The coronavirus outbreak has thrown a significant spanner in the works; we now think NZDUSD will remain around current levels or lower for Q1 and Q2, but remain optimistic about its prospects through to the end of the year.
As a small, open economy with a relatively high reliance on demand from China, and tourism in general, New Zealand’s economy may experience significant adverse effects in Q1.
However, conditioned on our base case assumptions that the coronavirus is contained at some point in Q1 or Q2 and the global economy recovers soon after, the effect is likely to be transitory, and also partially offset by tailwinds from good terms of trade and a weak New Zealand dollar.
The RBNZ is currently avoiding mention of any further rate cuts, but we think there is a modest (>30%) chance of one more 25 basis point cut if the economic effects of coronavirus turn out to be even worse than currently expected. This leaves risk tilted to the downside for NZD in Q1 and Q2.
Macro outlook stabilises – but coronavirus risks loom
Ignoring the risk posted by coronavirus in 2020, the NZ economy seems on track to enjoy growth of up to 3% in 2020, due to strong tailwinds from monetary and fiscal easing, as well as favourable terms of trade.
Following rate cuts from the RBNZ in 2019, and an improvement in US-China trade tensions, business sentiment has improved after a sudden deterioration in Q3 2019.
Tailwinds point to growth acceleration in 2020:
- Investment increases totalling $12bn, or about 4% of nominal GDP, were announced by the Government in December 2019, to be spread over a period of several years. This amounts to about 0.6% GDP per year over the Reserve Bank of New Zealand’s forecast horizon, although in practical terms the growth boost will be less than this due to “crowding out” effects.
- Higher meat and dairy prices, combined with slower imported goods inflation, have cushioned the economy from the 2019 slowdown in global growth. African swine fever in China resulted in increased demand and higher prices for beef, while dairy prices have been supported by drought conditions in key production regions in China. New Zealand’s terms of trade are likely to remain supported through 2020, although milk prices have seen a collapse recently that may worsen depending on demand from China.
- The RBNZ cut rates by 75 basis points in 2019, creating a substantial loosening in financial conditions and contributing to a recovery in business sentiment in Q4 2019. With rates at 1%, there remains scope for further easing in the event of a bigger than expected shock in Q1.
Chart: NZ Terms of trade & global growth outlook
Author: Ranko Berich, Head of Market Analysis at Monex Europe.