Sunday, July 3, 2022

Mixed confidence in the regions

Some key dairy-based regions were running, somewhat ominously, at a slower speed than others early in the new year.   The disparity was palpable in the Westpac McDermott Miller Regional Economic Confidence survey, which found economic confidence rising in most parts of the country. But Westpac economists, reporting the results, said big divergences remained among the regions, mirroring New Zealand’s multi-speed economy. Economic confidence in Canterbury continued to lead the pack by a wide margin – Cantabrians’ optimism for their region’s economy in the year ahead rose to its highest level since late 2009 – and Auckland’s confidence surged from marginally pessimistic to firmly optimistic, boosted by an increasingly robust housing market. The results were mixed in the more export-oriented regions. Confidence was rising in some but was falling in others, most notably Waikato and Southland. Dairy prices had been rising when the survey was conducted and there were signs global economic conditions were improving, Westpac said, but overall the level of confidence in most of these regions was still cautiously optimistic at best, a reminder that export conditions remained tough.

Taranaki/Manawatu-Wanganui was an exception. Economic confidence there was even higher than in Auckland, but the bank economists reckoned optimism for the region’s oil and gas industry might be playing a special role there.

Bad times

In Southland a net 25% of households were expecting mainly bad times over the year ahead. It is the most pessimistic the region has been since the Asian crisis in the late 1990s. That made Southland the second-most pessimistic region in the country after Northland, after being a standout for its optimism just six months ago.

Job cuts and the threat of the closure at Tiwai Point are likely to have been confidence-sapping factors.

Waikato’s confidence, on the other hand, has yet to be boosted by news that Yashili Group, a leading Chinese dairy producer, will establish a production line with investment of 1.1 billion yuan, about $210 million.

Yashili plans to produce 52,000 tonnes of milk powder a year from 2014, Chinese media reports. The NZ operations will also become the company's overseas base to produce finished and semi-finished infant formula products. Yashili has the capacity to produce 85,000 tonnes of formula/year.

Nevertheless, economic confidence among Waikato households has fallen and optimists now only just outnumber pessimists, with a net 1% expecting mainly good times over the year ahead, down from 9% three months ago.

Global dairy prices inevitably will have helped mould the region’s mood. They have risen off their lows but the forecast payout is still lower than last season.

The outward flow of profits from the new Chinese plant eventually will show up, negatively, in the country’s balance of payments. The bigger the profit, the bigger will be the drain.

The latest balance of payments data, for the September quarter, were published just before Christmas. They showed a deficit of $2.5 billion in the current account balance, $344m smaller than the deficit in the June quarter. This improvement was caused by a fall in profits earned by foreign-owned companies in NZ.

The goods and services balance, on the other hand, suffered a setback and fell back into deficit as imports outpaced exports, despite a large increase in dairy export volumes. The deficit was $82m, compared with a $125m surplus in the previous quarter.

Goods imports increased $279m during the quarter, mainly due to an increase in oil imports. Oil stocks held overseas by NZ-resident companies increased, along with imports of crude oil entering the country.

Exports of goods increased $158m on the back of increased dairy product exports. The volume of dairy products was up 32.3% but that was offset by a 13% fall in receipts.
The current account deficit was $9.9b, 4.7% of gross domestic product (GDP) for the year ended September 2012. This was a deterioration from $8.8b (4.3% of GDP) for the previous September year. The widening of the deficit over the year was also due to increased imports of goods.


The balance on goods was a surplus of $1.7b for the year, down from a $3.1b surplus for the previous September year.

Exports of goods remained flat as an increase in the value of dairy product exports was offset by lower meat exports. The increase in imports of goods, on the other hand, featured higher imports of petroleum and petroleum products as prices increased, more imports of passenger motor cars and greater volumes of mechanical machinery imports.

Export data since the balance of payments figures were assembled show the country’s exports were down $94m (2.4%) to $3.8b in November.

Dairying didn’t do as well as earlier in the year. Receipts for milk powder, butter, and cheese during the month were worth $1.1b, down $121m (10%) from November 2011, led by unsweetened whole milk powder (WMP), down $80m (15%). Butter fell $65m (46%).

Cheese partly offset this decrease, rising $46m (39%).

Among our trading partners, exports to China recorded the largest increase, up a robust 60% to $691m. The largest increases were for unsweetened WMP and pinus radiata logs, both of which roughly doubled in value.

Exports to the United States were up $73m (25%) for the month, compared with November a year earlier, led by increases in cheese and beef cuts.

The country’s trade balance for the month was a deficit of $700m, equivalent to 18% of exports. November monthly trade balances are typically deficits, but the latest month compares with an average deficit of 13% of exports over the previous five November months and was the biggest November deficit since 2006.

A pick-me-up for prices was needed. Recent trends for the values of the leading commodity groups show milk powder, butter, and cheese was 9.7% lower than its recent high of November 2011 and appears to have been decreasing further in recent months. But Statistics NZ said more observations were required to confirm this movement.

The pick-me-up was delivered by subsequent rises in commodity prices. The ANZ Commodity Price Index was up 1% in December, its fifth consecutive monthly rise. The index has risen 7% since last July but was still 14% below its April 2011 peak.

There were lifts in 10 commodity prices in December, including 1% rises in cheese, butter, and skim milk powder (SMP). Casein prices inched up by .25% but WMP prices eased 1%. The movements overall were enough to lift dairy prices to a nine-month high.

But the exchange trade was gnawing deeper into returns in NZ dollar terms. On a trade-weighted basis the value of the NZ dollar strengthened 1.1% in December, rising to a 5½-year high. The lift in the value of the kiwi dollar was greater than the rise in international commodity prices and the NZ dollar value of dairy prices was 13% below its level 12 months earlier.

A further price lift was registered in Fonterra's online dairy auction in mid-January, when the fortnightly GlobalDairyTrade (GDT)-TWI price index ended 1.1% higher than earlier in the month. This was a further improvement from the 2% rise at the previous auction.

BNZ market strategist Kymberly Martin said this was good news for the heavily indebted dairy sector and in line with the bank’s view of a positive trend trend in dairy prices in 2013.

The most important pre-Christmas set of statistics, measuring gross domestic product (GDT), gave a measure of dairying’s contribution overall to economic growth. The national economy grew 0.2% in the September quarter following a revised increase of 0.3% in the June 2012 quarter.


But increased activity in the goods-producing industries (up 1.2%) was partly offset by a decline in primary industries (down 3.2%). Agricultural production was down 2.8%, after higher-than-usual growth in the first six months of the year. The quarterly fall, largely due to a fall in dairy production, was the biggest decline in agriculture since a 9.5% fall in the June 2010 quarter.

The level of agricultural production was still high, nevertheless, due to strong growth in the first half of the year.

The expenditure measure of GDP rose 0.2% during the quarter. The production measure shows the volume of goods and services produced in the economy, while the expenditure measure shows how those goods and services were used.

The main movements in the expenditure measure of GDP in the September quarter included a 4% rise in exports of goods and services, mainly due to an increase in exports of dairy products and meat.

The volume of goods exported increased 5.5%, driven mainly by dairy products (up 27.7%), meat products (up 13.4%), and other food, beverages, and tobacco (up 3.2%).
In the year to September, primary-industry production was up 14.4%, compared with the September 2011 year, and agriculture was up 23.3% for the year, reflecting higher than usual growth in the first half of 2012. Export volumes for the year increased 3.1%, driven mainly by dairy products (up 13.3%).

Commenting on the GDP results, Westpac economists said subsequent data gave them comfort that activity picked up in the December quarter.

They said prospects this year were for growth to strengthen further but to remain a mixed bag, as the Christchurch rebuild grabbed an increasingly large share of activity.

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