Is New Zealand heading to recession? Slumping confidence and low dairy prices are hurting, but immigration is at a record high and tourism is booming. Photo/Chris Gorman.
Is New Zealand heading to recession? Slumping confidence and low dairy prices are hurting, but immigration is at a record high and tourism is booming. Photo/Chris Gorman.
Investment bank First NZ Capital says there is a 25 to 30 per cent risk of New Zealand's economy going into recession in the next 12 months.
Chris Green, the firm's director for economics and strategy, said he had become increasingly concerned in recent weeks about factors such as slowing growth in China, the dairy price slump and falling business confidence.
"If you'd asked me a couple of months ago we probably would have had a 5 to 10 per cent probability [of recession]," he said.
Green said some bright spots in the economy remained, such as the record migration numbers released today, as well the kiwi dollar's fall, which would benefit exporters.
"We've had a large hit to our largest export sector in dairy," he said. "If you look at business confidence now we're actually at a level that is historically been where we've had a recession."
Fonterra this month slashed its farm gate milk price from $5.25 per kg of milk solids to $3.85 per kg, which is well below break-even for most farmers.
Prices rallied in this week's GlobalDairyTrade auction, but analysts have warned that supply and demand in the dairy sector remains out of balance.
ANZ chief economist Cameron Bagrie said First NZ was making "a pretty aggressive call". "That sort of probability, to me, seems pretty high," said Bagrie, who didn't want to put his own percentage figure on the chances of a recession.
ANZ chief economist Cameron Bagrie.
However, he said the local economy was entering a period of heightened uncertainty. "The risk profile is more elevated than normal," Bagrie said. "But we've got to be careful here because if you strip out all the positives of course things are going to be negative."
He said New Zealand's key economic risk was the international environment.
"That's the one we're watching like a hawk because China is New Zealand's biggest source of opportunity in the next five to 10 years and it's also now our biggest point of vulnerability in the next 12 to 24 months," Bagrie said. "As we become increasingly hooked into that Chinese economy - which is a good thing - we've got to learn how to rock and roll with their swings."
He said the ongoing volatility in Chinese equity markets was "starting to tell us something about the underlying economic fundamentals" in China.
See the latest GlobalDairyTrade auction results here:
The decline is the first in five auctions Photo / Sarah Ivey
"They've taken on an awful lot of corporate debt and you've still got an economy that is trying to transition from an export-growth, investment-style model to consumption," Bagrie said. "That's a good economic transition that New Zealand will benefit from, but of course it is a transition that's fraught with uncertainty."
