New Zealand economic growth encouraging, but downside risks remain high

Over the past year, the New Zealand economy has performed quite well. The country’s real GDP grew 0.8 percent to 0.9 percent in sequential terms in the past four quarters. The Reserve Bank of New Zealand’s expansionary monetary policy has mainly benefited the domestic economy, turning to be the main growth driver, noted Commerzbank in a research report. In the previous quarter, exports also grew markedly, owing to the rebound in commodity prices.

However, downside risks continue to be high. The subdued growth outlook of China is being a drag on New Zealand’s external demand. Furthermore, still low commodity prices continue to lower the growth outlook via a weaker contribution of foreign trade.

The New Zealand central bank is seriously worried about the low milk prices, which continue to trade significantly below their levels from early 2014. The domestic dairy sector accounts for more than one quarter of the country’s exports. Even if prices of dairy have increased in recent times, milk prices are generally expected to stay under pressure because of the globally high production levels.

The RBNZ had cut its medium-term milk powder price forecast in August by nearly 10 percent. The country’s terms of trade would therefore keep suffering from low milk prices and therefore hurt the growth outlook in spite of strong domestic demand, stated Commerzbank.

However, the central bank’s main worry is inflation, as it continues to stay low in spite of sound growth. The central bank noted that expansionary monetary policy applied by several central banks has exerted an upward pressure on the exchange rate of the New Zealand dollar, which in turn is hurting the pace of inflation through lower import prices. Subsequently, inflation has stayed below the central bank’s 1 to 3 percent target range since late 2014.

An improvement is unlikely to be in sight even if the central bank has cut its key rate by 75 basis points in 2016. The solid exchange rate is expected to keep tradable goods inflation in negative territory, with the downward pressure on the inflation rate thus expected to stay alive, stated Commerzbank.

NZD/USD was trading at 0.7043 at around 1205 GMT. FxWirePro's Hourly New Zealand Dollar Strength Index stood at -39.4392 (neutral), while Hourly USD Strength Index stood at 141.687 (highly bullish). For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex