New Zealand Economy

Jesse Colombo has written an article in Forbes magazine warning that the New Zealand economy is in a bubble that will end in disaster. This grated a bit because the popular view among economists is that New Zealand is a rock star economy that is leading the pack. Politicians quickly jumped in to label Jesse Colombo as a doomster, who does not understand what is happening here.  However, he picked the subprime collapse, so he must be given some credibility.

I have some sympathy with Jesse Colombo’s view. The New Zealand economy is currently strong. The unemployment rate is 6%. The Treasury is forecasting real growth of 2.5% for the next couple of years.

Two things have helped the NZ Economy.

1. The Christchurch earthquake brought billions of insurance dollars into the country. Thousands of houses have to be rebuilt over the next two years. Many more need to be repaired. A huge number of commercial buildings are being rebuilt with insurance money. This is a huge boost to the economy.

2. International prices for dairy products are at record levels. This has really helped the New Zealand economy.

Despite this good news, there are two big worries about the economy.

1. As Jesse Colombo has pointed out, house prices are grossly overvalued. They have doubled in the last ten years. In Auckland , which is our the largest city, young people are paying more than half a million dollars for a do-up or an old dunger just to get into the market. Banks have been supporting the boom by providing mortgages for 95 percent and sometimes 100 percent of the purchase price. (The central bank last year introduced limits on loan to value ratios in attempt to cool the market). The central bank has kept interest rates very low for the last few years, but they are now beginning to rise. Household debt is very high, so many people are vulnerable to a decline in house prices or a big increase in interest rates.

2. The New Zealand economy is very dependent on the dairy industry. When I was growing up on a farm, the sheep industry was larger than the dairy industry. Over the last twenty years, a huge number of farms have converted to dairying. This has required an enormous capital investment, but returns have been very good, and farm prices have sky rocketed. Most of our milk products are exported to China. So we really have all our eggs in one basket. Last year, a faulty test that recorded botulism in milk powder stopped exports to China for a few days, until the error was corrected. Some categories of milk powder still do not have access to the Chinese market.

The New Zealand is very vulnerable to a biosecurity crisis that effects our exports to China. It would also be severely hurt by a collapse in residential real estate. So like most rock stars, New Zealand could easily fall off the edge.