December 2014
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LPC - moving ahead 12-page liftout
Low inflation keeps economy robust Hugh de Lacy New Zealand’s economy is holding firm - with inflation remaining lower than expected, while the continuing rise in immigration is also helping to drive growth. This is despite plummeting returns from both the dairy, in particular, and forestry sectors. Westpac chief economist Dominick Stephens said inflation is defying all predictions of a year ago and refusing to accelerate wildly. Also contributing to a continuing economic robustness and steady Gross Domestic Product growth of around 3% is the immigration boom, “The inflation picture has been very surprising over the past year: much lower than anybody expected,” Stephen said. “What that indicates is the New Zealand
economy’s capacity to produce goods and services without generating inflation – the so-called inflation speed limit – is higher than we thought, so it’s a good news story.” Only months ago home mortgage holders were rushing to fix their interest rates against an expected rapid hike as the economy shrugged off the hangover of the 2008 global financial crisis. But the feared 2-3% jump over a year or less, which would have seen many mortgagees struggling to meet their payments, simply hasn’t happened. “Markets are re-rating their expectations of where the overnight cash rate (OCR) is going over the next year or two. “They’re not looking at cuts, but whereas a year ago financial markets might have expected three or four [interest rate] hikes over 2015, now they’re looking at one or two,” Stephen said.
“With low inflation the Reserve Bank will be able to keep those interest rates low for longer than previously thought, and that’s why what you’re seeing at the moment is fixed mortgage rates coming down.” Other factors holding inflation in check include the plummeting price of petrol, down below $2 a litre for the first time in years, and relatively low upward pressure of wages. A two-speed economy was developing in an environment of “fairly strong” economic growth, with challenges to the export sector from dairy and forestry which will affect some regions of the country. “Equally we’ve got the Canterbury rebuild and Auckland construction activity, and my expectation is that house prices will start rising again pretty smartly on the population boom.” The strengthening US economy has pushed the New Zealand dollar well under the US80c mark,
enhancing the attractiveness of our exports, with the meat industry taking particular advantage. The low kiwi dollar is also helping put a floor below dairy returns which formerly comprised a quarter of total exports but which have plummeted to half their level of a year ago. That said, the latest Fonterra monthly dairy auction has shown further weakness in global demand that suggests a new floor price has yet to be reached. The net effect of these sometimes contradictory factors would be a slight worsening of the economic imbalances, such as a relatively small current account deficit and a shrinkage in overseas debt, that had been improving under a more inflationary environment. “We’ll end up with decent domestic demand propping growth up, with major faltering in the dairy sector detracting from growth to an overall average [GDP growth] similar to the last couple of years.”
New factory for Skellerup Hugh de Lacy Christchurch rubber manufacturer Skellerup Industries has unveiled plans for a new factory in Christchurch. The $30 million new plant at the Wigram Business Park will replace its quake-damaged Woolston factory where much of its agribusiness supplies are made, for the dairy industry in particular. Partly funded by earthquake insurance money, the new 18,900sqm factory is 20% bigger than its old one and is expected to be occupied progressively by the existing 200 staff in about December of 2015. Skellerup chief executive David Mair said he didn’t expect the company’s annual revenues of about $200m would be greatly affected by the halving of New Zealand dairy farm revenues in the past year, because the company’s domestic markets represents only a small part of its turnover. “If you pulled it right down to how much revenue was generated by things that New Zealand farmers buy, it’s of the order of 10% to 12%,” Mair said. Dairy equipment was a major part of Skellerup’s domestic and export business, along with the gumboots that made it a household name in New Zealand, but dairying was still in expansion mode. “There is an expansion of [dairy] farms under way in the South Island through Ngai Tahu, and there have been irrigation schemes finished, but what it comes down to is credit for farmers, and I don’t know if that’s going to tighten up or loosen.”
INSIDE
All bound for Queenstown .... Queenstown Airport is expanding its facilities at a rate unparalleled by any other transport business or agency in New Zealand – and it continues to expand in both passenger traffic and services at the airport. The first stage of an estimated $12 million project to expand international
Protection for sub-contractors - PAGE 2
Visitor levy for Queenstown? - PAGE 2
operations at Queenstown Airport is expected to be completed by June next year. The expansion will more than double the size of the international terminal and comes on the back of a big increase in both domestic and international passenger numbers. See story page 2.
Passion for organics drives business - PAGE 3
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