Investment intentions highest since 1975

April 9, 2014

The NZIER has more good news on the economic front:

Recovery surges ahead as firms remain the most confident in 20 years

Economic activity strengthened in early 2014, according to the NZIER’s March 2014 quarter Quarterly Survey of Business Opinion (QSBO). Trading activity, which closely mirrors GDP growth, accelerated to the fastest pace since December 2003 – when annual GDP growth was near 4.5%.

“While we do not expect economic growth to hit such heady rates in the current business cycle, as credit conditions are very different now, our latest survey paints a clear picture: the recovery is strengthening”, said Shamubeel Eaqub, Principal Economist at NZIER.

Firms are translating optimism into jobs and investment

Business confidence held steady in the March quarter, and remains at the highest level since mid-1994. Optimism and activity is being realised into hiring, investment, increasing margins and profits. Intentions to invest in building, in particular, are soaring and are at the highest level since records began in 1975. . . 

In 1975 New Zealand was highly regulated, protected and subsidised.

Thanks to what the left still deride as the failed policies of the 80s and 90s businesses now stand or fall on their own merits rather than political patronage.

Soaring confidence is based on the strong foundation of performance and not the shaky one of political whim as it was in those bad old days.


Growth forecast 3% – NZIER

March 1, 2014

The New Zealand Institute of Economic Research is forecasting economic growth of 3%, the best since 2007.

Strong growth this year will come from the resumption of ‘normal’ spending and investment patterns and surging Canterbury reconstruction. The reconstruction will contribute one-third of GDP growth this year (Figure 1). . .

The institute expects interest rates to rise and sees a risk in large policy shifts:

The general election later in 2014 will see a plethora of policy announcements from political parties, tempted by looming fiscal surpluses. Spending promises should be seen in the context of steeply climbing fiscal pressures associated with ageing, and the inevitable trade-offs that this will present. We do not expect the election to have any immediate impact on economic growth, but any large shifts in policy will shape future economic growth.

National’s policies have got us through the recession, back on track to surplus and growth.

The return to high taxing, high spending, anti-growth policies the opposition are promising would put that all at risk.


Confidence up, south leads

April 9, 2013

Business confidence is at its strongest since June 2007, when the domestic economy was starting to turn down ahead of the global financial crisis in 2008, according to the latest Quarterly Survey of Business Opinion from the New Zealand Institute of Economic Research.

The March quarter survey shows economic recovery broadening beyond Auckland and Christchurch, and no apparent impact from a string of corporate restructuring announcements in the first three months of the year, and the collapse of the Mainzeal construction group.

A net 23 percent of firms expect better trading conditions in the next quarter, up from 20 percent in the previous quarter, while a net 32 percent firms are optimistic in March, seasonally adjusted, compared with 19 percent previously. . .

A Grant Thornton International Business Report (IBR) shows southern businesses are more confident than those in the north.

. . . 16.8% of South Islanders are very optimistic about the economy in the next 12 months compared with 8.10% of the North Island.

Simon Carey, partner, Grant Thornton New Zealand Ltd, said that the gap narrows when talking about optimism overall with 65.2% of South Islanders being optimistic compared with 61.6% of North Islanders.

“These optimism figures are supported throughout the survey with South Island firms expecting to generate more revenue than North Island companies (68.4% to 66.7%), generate better selling prices (46.3% to 38.4%), employ more staff (44.2% to 34.3%), invest in plant and machinery (62.1% to 54.5%) and pay higher wages with 80% looking to increase salaries in line with inflation and above compared with 72.7% for the North Island. At the generous end, 22.1% of South Island firms will increase salaries at levels above inflation compared with 19.2% for the North Island.

 “Optimism in the South Island has been trending ahead of the north for some time as evidenced by the research which revealed that 45.3% of South Island firms employed extra staff in 2012 compared with 29.3% for the north. These employment figures were further reinforced by the fact 25.3% of North Island firms decreased their staff in 2012 compared with 16.8% for the south.” . .
Confidence is important not just for the businesses but for the wider economy. The more positive a business is, the more likely it is to increase investment and take on more staff.
The global outlook is still uncertain but these reports reflect the positive view the IMF has of our economy.

Recovery at last?

January 16, 2013

Economic activity in the December quarter  surged to the best level since mid-2007 according to the New Zealand Institute of Economic Research’s Quarterly Survey of Business Opinion.

Businesses are more optimistic (+19% from -1%, seasonally adjusted). The trading activity indicator for the December quarter also surged to the best level since mid-2007 (+8% from -4%, seasonally adjusted). This suggests annual GDP growth for 2012 will be above 2%.

“There are encouraging signs of a strengthening economic recovery. The latest bounce is concentrated in Auckland, and Canterbury to a lesser extent,” said Shamubeel Eaqub, Principal Economist at NZIER.

Subdued labour market

The latest pickup is not yet flowing through to the labour market. New hiring remains subdued and labour is getting a little easier to find outside of Canterbury. This is surprising as a recovery in activity tends to be accompanied by more jobs and increasing competition for labour that raises wages. This part of the recovery remains absent. It may be explained by reduced working hours during the recession, which are now returning to more normal levels, rather than through increased hiring.

Investment intentions, while positive, are also low compared to what we normally see in a recovery phase.

Little inflation

Capacity pressures are intense in Canterbury, but there is little pressure in the rest of the country. Firms do not intend to raise prices much. Consumer price inflation will remain low. Margins remain under pressure, but profits are beginning to lift on the back of better sales volumes.

RBNZ to hold interest rates steady

The RBNZ will keep interest rates on hold for some time. The QSBO shows the beginnings of a recovery, but still very low inflation.

nzier 2

One quarter does not a full recovery make but it is a long awaited sign of improvement.

The Christchurch rebuild is having a positive impact further afield than Canterbury.

Building tradespeople I’ve spoken to in Oamaru in the last week say they were busy at the end of the year and busier still this year.


Water is the key

July 25, 2011

Federated Farmers’ new president Bruce Wills says water is the key to both economic growth and environmental enhancement:

Water is to New Zealand what black coal is to Australian exports.  It’s the true backbone.

The challenge for us as the agricultural sector, from farm to processing plant, is to state the environmental case.   If we do not put the environmental case alongside the business case, the regulatory brakes will come on at the behest of the wider community. 

This is our call to step up.

It’s no good for us to have access to investment cash, willing investors and a world wanting our exports, if schemes get knocked back in the Environment Court or by the Environmental Protection Agency.

Half the game is to meet limits around water quantity. In this arena, rural water infrastructure can deliver positive wins for the environment, one example being minimum ecological flows while delivering reliable water to primary producers.

Native fish and water fowl cannot inhabit rivers that dry up over summer.

But the other half of the game will be to meet limits around water quality.  This is where the real challenge comes.

Will increased production from irrigated land inexorably drive increased leaching? Can we secure environmental integrity alongside economic growth? These are tough questions being asked right now let alone what will come.

In the next four decades, we could easily increase the amount of people we can feed some 2.5 times.  From 20 million to 50 million people plus.  We have immense opportunities to export agricultural services but none of these things matter, unless we can take our communities with us.

The world is short of food, many areas in New Zealand have the potential to produce more providing they can get reliable water.

The challenge is to convince those who might oppose development, that irrigation and the increased production it enables won’t come at the expense of the environment.

Our district has been transformed by irrigation.

Instead of playing catch-up between droughts, farmers have been able to budget on reliable production under irrigation. Rural communities have had a population boost as new jobs have been created. Soils which would have blown away in droughts, have been anchored down by pasture thanks to irrigation.

As well, independently audited environmental farm plans, ensure the protection and enhancement of land and waterways.

The NZIER looked at “The economic impact of increased irrigation” last November, estimating the economic benefits for ‘NZ Inc’of 14 schemes under development.

These 14 schemes will deliver an irrigated area of 350,000 hectares, 270,000 hectares being in Canterbury. 

By 2026, these 14 schemes will deliver extra production worth $2 billion a year at the farm gate and almost $4 billion in exports.  This, by the way, is 2010 dollars too.

This is a significant increase on the $23 billion in primary exports from 2008/9Off-farm infrastructure costs with water storage are relatively modest compared to the real gains in agricultural output. 

Water storage offers bangs for modest bucks.  The 2011 National Infrastructure Plan goes further echoing what Federated Farmers has said for years.  Water is our unique competitive advantage and is fundamental to economic growth. 

The economic and social benefits are obvious.

The challenge is to provide the evidence that rather than coming at an environmental cost, irrigation can protect and enhance land and waterways and provide enhanced habitats for wildlife.


Upside to high $

June 1, 2011

The New Zealand dollar hit a post-float high of  82.62 US cents yesterday.

That makes exports traded in US currency more expensive but it also makes imports cheaper and the NZIER says it will help keep inflation down.

Inflationary pressures are building because businesses have seen their margins slimmed down and will want to recoup some ground when the economy picks up pace – likely to begin in 2012 as the rebuild of Christchurch gains pace, according to the institute Quarterly Predictions report.

“The RBNZ will need to raise rates next year towards 4% to offset these inflationary pressures,” NZIER principal economist Shamubeel Eaqub said in a statement. “A high NZD is helping to keep a lid on inflation for now. We expect the NZD to remain elevated for some time,” he said.

 Beef + Lamb New Zealand’s (B+LNZ) Economic Service’s report on movements in sheep and beef input prices showed a 4.1% increase in the year to the end of March this year, in contrast to a 2.9% decrease the previous year.

The increase has been driven by the price of fertiliser, fuel and increases in banking interest rates, says B+LNZ Economic Service Executive Director, Rob Davison.

 “The price rises for fertiliser and interest have a big impact given they are the largest areas of expenditure on sheep and beef farms.

If the higher dollar helps keep the price of fertiliser down and keeps a rein on inflation which in turn reduces the need for interest rate rises it will compensate for the currency’s impact on export prices.

Normally when the dollar is high farmers complain. There’s hardly been a whimper this time, and nor should there be. Commodity prices are still holding up and the higher dollar takes the pressure off the price of inputs like fuel, fertiliser and machinery.

The Fieldays open in a couple of weeks. They’re a barometer for farming confidence and exhibitors will be expecting to make good sales.


Dairying doing it for NZ

December 9, 2010

It’s easy to see the positive social and economic impact dairying makes in North Otago, there is now proof of how the wealth generated from milk benefits the whole country.

An independent report by the New Zealand Institute of Economic Research, released today, shows money from milk flows right through the economy, starting at the farm gate and moving out to rural and urban communities.

The report to Fonterra and DairyNZ shows:-

  • Dairy provides 26% of New Zealand’s exports.
  • A $1 rise in Fonterra’s payout makes every New Zealander nearly $300 better off.
  • Dairy farmers spent around 50c in every dollar they received on locally produced goods and services.
  • Every tonne of dairy exports helps reduce the current account deficit, bringing down interest rates and reducing mortgage payments for homeowners.
  • Dairying employs 35,000 workers directly and a further 10,000 contractors.

Fonterra CEO Andrew Ferrier said today the report, commissioned by Fonterra and DairyNZ, will enable New Zealanders to better understand that when dairy does well, New Zealand does well.

“Most people understand dairy is a key export industry. Now they can understand what it means for them as the report accurately quantifies, for the first time, the tangible benefits to both rural and urban communities,” said Mr Ferrier.

An increase of $1 to Fonterra’s payout boost real incomes by about $270 for every person in New Zealand, showing everyone benefits when the company does well.

“Of the $7.5 billion farmers received in 2009, $3.6 billion was spent on domestically produced goods, including fertiliser, feed, agricultural services and financial services.

“There is no doubt that dairy has helped us out of the recession and the benefits extend well beyond the farm gate.  Export growth from the dairy sector has helped narrow the current account deficit and that helps everyone through lower interest rates on mortgages and other borrowings.”

NZIER Deputy Chief Executive, John Ballingall, said: “Our modelling shows that the dairy sector has delivered significant and ongoing benefits to the New Zealand economy.”

“Its influence extends well beyond its direct impacts in dairying areas, with the sector closely intertwined with the rest of the economy. That includes the jobs it delivers, the income that these workers earn, its links to supply firms, the effects of rural economic growth on urban centres and the tax revenue it provides to fund public services.

“The sector’s strength has been very evident as New Zealand recovers from the global financial crisis and domestic recession. Given anaemic domestic demand, the export side of the economy has been relied on to generate economic growth and dairy has made a significant contribution.”

DairyNZ Chief Executive, Dr Tim Mackle, said that last year dairying kept 35,000 people directly in work. “Our contribution to jobs is like having a city the size of Gisborne all working in the dairy industry. Urban centres also get a healthy share of indirect employment as they provide essential goods and services that are needed to produce dairy products.”

Dr Mackle said the NZIER report shows dairy accounts for 26 per cent of New Zealand’s total exports and it is looking to grow its contribution to the country.

“We’ve got a good track record of supporting regional growth, which this report shows, and we want to continue this trend. The challenge for our industry will be in how we achieve this growth in a sustainable way,” said Dr Mackle.

Highlights of  dairying’s contribution to the regions, based on 2009 figures,  include:

Waikato

  • Regional dairy production was worth $2.4 billion in 2009 (Matamata-Piako $552m, Waikato district $390m, Waipa $361, South Waikato $263m, Hauraki $196m)
  • More than 8,000 employed in local dairy industry

Bay of Plenty 

  • Regional dairy production was worth $605 million in 2009
  • Dairy revenue of $254m in Rotorua district
  • Bay of Plenty employs more than 3,200 directly in the dairy industry

Taranaki 

  • Regional dairy production was worth $822 million in 2009
  • Taranaki employs almost 3,900 directly in the dairy industry
  • 26 per cent employed in South Taranaki district by dairy industry, nearly 9 per cent of total dairy related employment in New Zealand

Manawatu-Wanganui/King Country

  • Dairy production in Otorohanga was $234m in 2009 and Tararua $188m
  • These regions employ more than 3,200 directly in the dairy industry

Canterbury

  • Regional dairy production was worth nearly $1 billion in 2009 (Ashburton $471m, Selwyn $270m, Timaru $185m)
  • Canterbury employs nearly 3,500 directly in the dairy industry

Otago/Southland

  • Regional dairy production was worth nearly $900m in 2009 (Southland $710m, Clutha $182m)
  • Otago/Southland employs more than 4,200 directly in the dairy industry.

The full report is here.


Dairy subsidies to cost NZ $122m

June 27, 2009

Federated Farmers president Don Nicolson got a lot of attention for his piece in the Wall Street Journal on milking trade subsidies.

Perhaps he should follow that up with an invoice because the New Zealand Institute of Economic Research has calculated that the subsidies on dairy products introduced by the EU and USA will cost the New Zealand economy $122 million.

New Zealand’s dairy output may fall by around 5% and the value of milk, butter and cheese exports could decline some 8% as American and European subsidies create an oversupply of product, according to the NZIER’s latest Insight newsletter. The think-tank predicts the global economy will be worse off by around US$41 million, although countries such as Japan and Korean would benefit from lower world prices.

The prospect of lower dairy prices “will cause kiwi farmers’ incomes to fall below where they would otherwise have been, through no fault of their own,” said the institute’s deputy chief executive John Ballingall. “The risk of ongoing retaliation between the U.S. and EU, and potentially others, could lead to larger increases in subsidies, tariffs and other trade barriers over time.”

The immediate impact of the subsidies was partially responsible for the decrease in Fonterra’s forecast payout for the new season.

The threat of ongoing retaliation, bigger subsidies, tariffs and other trade barriers is even more concerning. It will hinder the recovery and hamper progress towards freer trade.

The NZIER Dairy Insight newsletter is here.


First do no harm

June 18, 2009

First do no harm is a guiding principle in medicine.

If politicians and bureaucrats abided by it too we wouldn’t be saddled with the Kyoto Protocol in its current form. Nor would New Zealand be in danger of scoring an on-goal economically while at best making no impact on the environment and almost certainly  making it worse.

However, a joint report by the NZIER and Infometrics provides a glimmer of hope that reason might be brought to bear on our Kyoto commitments.

Environment Minister Nick SMith said at its release:

This report concludes that a modified emissions trading scheme is the best way forward. I am releasing this report to assist with informed public debate on climate change.

“The report highlights that the costs to New Zealand’s climate change policy are significantly greater if other countries do not put a price on carbon. This reinforces the Government’s policy of aligning our response more closely with other countries.

The report concludes:

On balance, our recommendation in the short run is to introduce an ETS with free allocation to competitiveness-at-risk sectors, with agriculture excluded if measurement of its emissions is prohibitively expensive. Free allocation should be output-linked and phased out as our competitors adopt carbon pricing. If agriculture is initially excluded it should be transitioned into the ETS, with free allocation if required, as measurement becomes economic.

The hardworking MP for Eketahuna, Alf Grumble, reckons this will give agriculture a bit of breathing space. I trust he’s lobbying his colleagues to ensure it does.


Who Benefits from Subsidies? – corrected

May 9, 2009

A post on Anti-Dismal about who gets what from agricultural subsidies concludes the biggest gains go to the landowner. * corrected below

That is backed up by this paper by Chris Nixon from NZIER which says that product prices are capitalised into land prices.

The findings Anti-Dismal points to, indicate it doesn’t matter if they are real market prices or ones artificially inflated by subsidies.

However, if the impact of the removal of subsidies and the ag-sag which followed that is any indication,  subsidies benefit those who depend on farmers too.

When subsidies were removed after the 1984 election, farmers were brought kicking and screaming into the real world and many feared there would be a mass exodus from farms. Farm values fell – adding credence to the view that product prices are reflected in land values – and some people were forced to sell, but most hunkered down and learned to stand on their own feet.

However, when the subsidies went, farmers’ incomes fell,  they stopped spending and jobs were lost downstream. The worst effects weren’t felt by farmers but by the people who processed what they grew, worked for, contracted to, supplied and serviced them.

If the removal of subsidies hurt those downstream more than farmers, they must have benefitted from subsidies too.

Correction: * Paul Walker points out in a comment below that it was the farmer not the landowner who benefits most.

Since it’s now two days after I made the original post, I’ll address that in a new post.


Food miles fallacy foiled by facts

February 25, 2009

The food miles campaign is thought to be one reason for a 15% fall in New Zealand lamb sales in Britain.

For four years now some UK shops, like Tesco, have been promoting the food miles concept, meaning the closer to home something is produced the more sustainable it is. Now, the New Zealand Institute of Economic Research says it can prove that theory wrong. 

“Our cattle are grazed on grass rather than grain, and they’re housed outside most of the year rather than being in heated sheds,” says John Ballingall, “so the energy used in producing New Zealand food is often lower than the UK.”

In fact, the research shows that an average trip by car to the supermarket in Britain, 6.4km, to buy the weekly groceries uses the same amount of energy as shipping that food 8500km.

That’s a very impressive statistic but ecopolice don’t always let the facts get in the way of their religion and the green message is even infecting British hospitals which are being encouraged to  serve less meat and cheese  in a misguided attempt to be kinder on the environment.

Hospitals should serve meals which meet the dietry and health needs of the patients at the lowest cost and base their policies on facts not politics.

Less meat and cheese may be better for the health of some patients but not necessarily all and buying local isn’t necessarily better for the environment.

Food transported 100  miles by 10 trucks may have more impact on the environment than having it moved 1000 miles by one truck and as the NZIER figures above show going thousands of kilometres by ship is better than a few by car.

Besides, the distance food travels is only one factor in an assessment of it’s environmental footprint. A Lincoln University study showed New Zealand dairying produced less greenhouse gas than British dairying, even when the shipping was taken into account.

Given how short most hospital stays are these days patients are probably not in danger from the new prescription for their diets, but the implications of the other “green” initiative of greater sterilisation and reuse of equipment could be very serious if it increased the risk of infection.

However, the food miles debate might be academic because sustainability tends to be the concern of those wealthy enough to choose and as the recession bites households and hospitals alike are more likely to be more concerned about how much food costs than how far it travels.

Hat Tip: No Minister


Stats confirm agriculture still important

July 28, 2008

NZIER economist Chris Nixon was speaking to the converted when he explained the importance of agriculture at the AGMARDT breakfast during the National Bank Young Farmer Contest.

He said that although agriculture contributes only about 5% of GDP at the farm gate that is only part of the story.

Agriculture has a major impact on downstream and upstream activities. The impact of these industries suggests that roughly 20% of GDP is directly affected by on-farm agricultural activity. These include businesses that service the farming community (downstream) and those that turn farm produce into consumer products – transport and logistics, processing, and marketing activities.

Furthermore, agriculture has a major impact on exports. Land and sea based exports are roughly 42% of exports.

 

The importance of agriculture to our economy is confirmed by a Statistics New Zealand report prepared for Fontera which showed dairy products accounted for 27% of exports earnings for the year to May and all but 2% of that was from Fonterra.

Fonterra is the world’s largest dairy exporter, fifth largest dairy company globally and trades in 140 countries. Chairman Henry van der Heyden said much of the increase had been driven by record commodity prices.

“If we hadn’t had the drought, which saw our milk production drop by around 4 per cent, the figure could have been even higher,” he said.

World economic growth and demand from emerging markets – along with reduced supply, drought in Australia and biofuel production driving up the costs of feedstock – helped drive up dairy commodity prices.

The ANZ Commodity Price Index for dairy products hit 291.9 in November, having risen for 15 consecutive months from 127.6 in August 2006. The dairy index has since fallen in all but one month to reach 256.7 in June.

“We’re seeing continued investment from farmers and in our processing capacity. That’s a huge boost, particularly for regions like Southland with a lot of new jobs and benefits flowing through,” van der Heyden said.

“It’s great that dairying is able to make such a positive and timely contribution to the New Zealand economy at a time when the broader economy is facing increasing pressure.”

It is indeed, although the best may still be ahead of us. Nixon said it takes roughly 18 months for export performance to filter through to the domestic economy so the impact of the good prices farmers are getting now won’t show up beyond the farm gate until the end of next year.


Farmers get tiny slice of food price

May 15, 2008

An NZIER report commissioned by Federated Farmers shows producers are not the main beneficiaries of food price rises.

The farmer’s share of the retail price was 40.12 % for honey, 35.46% for milk, 30.97% for lamb chops, 18.86% for blade steak, 16.37 for bread and just 5.3% for cheese.

Feds President Charlie Pedersen  says that means the farmer’s share is just three slices or bread in a 20 slice loaf, one of four pieces of steak, three glasses from a two litre bottle of milk and a tiny slice of kilo block of cheese.

The cause of high food prices is complex and outside the control of the food producer. Transport, processing, energy and marketing, plus normal margins are some of the factors which have pushed prices up. There is a link to export prices, but this has never changed since New Zealand began exporting meat back in 1882. There is a misconception that because dairy farmers are receiving good payouts from Fonterra, this is driving up prices.

In fact, fertiliser and the cost of compliance have risen. Food producers have had to cope with a severe drought and pay high prices for supplementary feed for their stock. Many sheep and beef farmers will suffer losses this year adding to the losses of previous years.

This report clearly shows that food producers are certainly not ‘creaming it’. Let’s not forget that food producers also have to buy food for their families.

Let’s also not forget that the farmers’ share is a gross return.

The full report concludes:

One influence on the gap between retail food prices and farmers’ returns is changes in general prices in the economy (inflation), particularly from goods such as petrol. Inflation also puts downward pressure on farmers’ profits, as the returns farmers receive need to cover increasing costs of production.

A feature of New Zealand agriculture is that the majority of our agricultural production is sold in markets overseas. New Zealand also imports a significant proportion of food by value. Given the significance of these international factors, addressing increasing domestic food prices requires a response broader than simply targeting the returns to New Zealand farmers. Lowering domestic farmers’ returns

may depress the domestic supply of food, and in turn increase dependence on  imported foods and the growth of food prices further.

 

We saw this happening when we were in Argentina last April. The Government had increased taxes on exports of beef and dairy products in an attempt to keep domestic prices low. But as our host, an economist, pointed out the market always wins because farmers were getting rid of cattle and growing soya instead which was giving a much better return. As a result of this meat and dairy supplies were decreasing and there were fears Argentina would have to resort to imports at world prices.

 

An increase in the export tax on soya earlier this year led to farmer protests and in spite of resulting shortages of food, an Argentinean friend said most people support the farmers rather than the Government.

Rising prices of basic foods here has led to calls for subsidies. Those of us who went through the ag-sag of the 80s know the trouble that would cause.There are no easy answers to the question of making food affordable but attempts to tax exports or subsidise producers will only make the problem worse.


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