Inside Economics: Why the Kiwi dollar is so low and why it’s a good thing; plus, an alternative to GDP?

The value of New Zealand currency has fallen away sharply this year. Photo / NZH File

OPINION

Welcome to Inside Economics. Every week, I take a deeper dive into some of the more left-field economic news you may have missed. To sign up for my weekly newsletter, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.

Currency concerns

Hi Liam,

Q: Why has the NZ dollar decreased so much in value in the past few months?

Fred S

A: Hi Fred. The short answer is that our interest rates have fallen away faster than many other nations – particularly the United States.

With relatively lower rates the investment return for holding New Zealand currency is lower. Currency traders are looking more favourably at currencies where rates remain higher.

Analysts expect that the Kiwi will stay under pressure for several more months while the Reserve Bank works its way to the end of this monetary policy easing cycle.

Sometimes other factors will affect a nation’s currency – things like economic growth, inflation, debt, and the trade balance.

But right now the interest rate differential is the driving force.

That’s not great news for those planning an international holiday this year but it comes with a pretty significant upside for the economy as a whole.

In a note about New Zealand’s strong export performance in the past several months, BNZ senior economist Doug Steel points out that it is quite unusual for the Kiwi dollar not to rise on the kind of export boom we’re currently experiencing.

“Usually, higher commodity prices are accompanied by a higher NZ dollar,” he said.

“One consequence of that is that exports do not lift as much as they otherwise would. And, the benefits of the world buying NZ products at higher prices are effectively spread across the country via lower than otherwise import prices.”

So conversely, right now, New Zealand exporters are in a rare sweet spot with both a relatively low dollar and relatively high prices looking entrenched.

The flip side is that we aren’t getting the benefit of lower export prices.

“This time around the NZD has fallen, despite gains in commodity prices on world markets,” Steel said.

“The currency has been responding to other global factors. Its weakness has amplified export prices in local currency terms.

“The benefit of the world buying our products at higher prices is still present and is clear to see.”

But with the dollar staying low the import prices are rising.

This is helping shrink our current account deficit (as we import less and export more).

But it means the “transmission mechanism” through the economy is different and may well be slower, Steel said.

In other words, it may take a little longer for the wealth effect of higher export prices to filter through to consumers.

Lack of confidence

We could see the influence of the low dollar effect in recent confidence surveys, Steel said.

Agriculture sector confidence is at levels of elevation seldom seen, while, consumer confidence remains weak.

“That situation is unusual – the two are usually positively correlated,“ he said.

High farmer confidence was one thing, but the decision to spend and invest was another, he said,

“We have no doubt higher primary returns will support economic activity ahead, but drought and elevated global uncertainty will inject a fair amount of caution into the mix.”

Last week the Westpac McDermott Miller Consumer Confidence survey showed a surprising slump – seemingly at odds with improving GDP growth.

“Amid the flashy looking 0.7% headline fourth quarter GDP growth number last week, private consumption barely grew at all in the quarter or over the year,” Steel said.

“Low consumer confidence raises the risk that household spending undershoots our (and the RBNZ’s) current forecasts.”

We get an update on consumer confidence on Friday, with the ANZ’s monthly index for March.

This should hold a bit more interest than usual, Steel said.

“A decline seems likely, with interest in whether it corroborates (or not) the significant drop in the [Westpac] index last week.

“Consumer inflation expectations are volatile month to month but will also be worth a glance to see if the hint of a push higher over recent months is sustained or not.”

While the low dollar and slower transmission of an export earnings boost might be extending the recessionary pain for many consumers it can’t be a bad thing for the economy at a structural level.

Earlier this month the International Monetary Fund noted that it expected to see our current account improving through the rest of this year.

While higher import prices might raise the spectre of inflation, Steel points out we might be all right.

“Interestingly, even though the NZD is lower than one might associate with higher commodity prices, it is not lower than what the RBNZ has built into its forecasts,” he said.

“Indeed, at 68.1, the [trade weighted index] is tracking slightly above the Bank’s assumptions so not a reason to fret further about inflation.”

An alternative to GDP?

Q: Dear Liam

Gross Operating Surplus – a true measure of economic performance?

As I understand it a Gross Operating Surplus is a measure of the surplus of NZ-incorporated “gross profit” and includes earnings from private sector companies and surpluses from government-owned businesses and income from unincorporated businesses, such as sole proprietorships.

It includes depreciation but excludes labour costs, interest payments, tax, and non-operating expenses (be great if it did include them!).

Rather than a simple focus on GDP change, it would be interesting to hear how our underlying profit performance as a country is going. It is this that pays the bills, rather than the top-line number.

The UK, US and Australia have this measure. I am told we do too, but I have found it impossible to uncover in the plethora of NZ stats reports. Any ideas?

Regards

Wayne Jackson

Thanks, Wayne,

I think you’re right that gross operating surplus is an interesting measure that could do with more attention.

A really simple way to describe it (according to Stats NZ) is that the gross operating surplus is effectively the total of business profits in an economy.

Stats NZ measures it and uses it as a key input in its calculation of GDP by income.

Stats NZ reports it in combination with gross mixed income (which includes return on capital and labour so it can capture freelancers and small contractors who can’t easily separate their labour contribution from their capital investment returns).

As you’d hope, it has been on the improve following a big slump in the middle of last year.

In fact, it surged in the fourth quarter of 2024 by 3.9%. That’s a big rebound but from a lousy preceding period.

The September quarter saw growth of 0.7% but the June quarter was negative 2.1%.

Three flavours of GDP

Having mentioned GDP by income it seems worthwhile taking a minute to look at what that means.

One of the interesting things about GDP is that it is measured in three different ways.

Stats NZ measures it by production, by expenditure, and by income (as do most other developed economies).

In New Zealand, it is the production measure we use as the official GDP rate.

Here’s how Stats NZ defines them:

Production measure of GDP (GDPP) – This measures the total value of goods and services produced in New Zealand, after deducting the cost of goods and services used in the production process.

Expenditure measure of GDP (GDPE) – This measures final purchases of goods and services produced in the New Zealand domestic territory.

Income measure of GDP (GDPI) – directly measures the incomes received by the owners of the factors of production, reflecting the returns to the labour and capital employed such as wages, salaries, and profits.

Measuring economic output in these three ways helps us know we’re getting it right.

In theory, all three methods should yield the same result. In reality, there are often slight differences to do with discrepancies in data.

But the overall trend should be the same. If it isn’t then we know there is a problem.

GDP flaws

Finally, I don’t want to ignore broader criticism of GDP as the primary measure of economic progress.

But I’ve written before about the problem of putting too much weight on GDP.

Its flaws are many and well-documented. It is always months out of date, and usually subject to substantive revision.

There’s also been a bit of controversy in recent years about what it doesn’t count.

Former National Party politician-turned-academic Marilyn Waring has written extensively on the notion that GDP is inherently sexist because it fails to capture and value work that is done in the home – traditionally by women – that is clearly of great value to society.

There are also other hugely valuable human activities that GDP largely ignores, like charity work. Then there’s the black market, the underground economy of illicit goods that aren’t captured by official accounts.

And of course, GDP doesn’t really measure happiness or wellbeing.

But as Wayne argues above, it is fairly broad and captures a lot of economic activity that might not be considered productive or wealth-creating. He makes the case for a narrower focus on business output.

After the big revisions late last year (that revealed a much deeper two-quarter recession in 2024) the Reserve Bank and other economists have indicated they are paying more attention to so-called “high frequency” data.

In other words, more regular monthly stats that offer clues to GDP – like the Performance of Manufacturing and Performance of Services Indexes, commodity prices, retail spending, and export prices.

Unfortunately, there’s usually a trade-off: the more up-to-date data is, the less complete of a picture it gives us.

So on balance I think GDP is important. It provides us with a baseline for activity within the economy.

We can debate the ways we should interpret it or how much weight it should be given but without it, I think we’d be much less well informed.

Perhaps relying on GDP a bit less is a good thing.

But as I’ve argued before, an even better thing would be providing Stats NZ with the resources to produce more timely data with greater accuracy.

Ironically, that’s the sort of thing the Government would have more capacity to fund if GDP growth was a lot stronger.

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003. To sign up to my weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.