Treasury Predicts High Export Returns

Treasury Predicts High Export Returns And Growth Will Taper Off

INSIGHTS ABOUT THE NEWS - The Treasury’s rundown on the country’s economic growth over the next five years and its export expectations are contained in the Pre-Election Economic and Fiscal Update, published last week. It was not as upbeat as some parties with big spending plans had hoped and this reportedly delighted Finance Minister Steven Joyce.

As reported in Trans Tasman's sister publication The Main Report Farming Alert, the PREFU forecast growth in the 2017/18 year to pick up to 3.2% as exports rebound from a period of weakness, increasing to 3.7% in 2018/19. The cyclical upturn in the international economy is one of the driving factors.

The improvement in global conditions evident earlier this year has been maintained through the June quarter and above-trend growth is projected to continue in several advanced economies, leading to further declines in unemployment. This implies a bigger demand for NZ primary exports.

Growth in China is expected to be only a little lower than last year, supported by increased spending on infrastructure and property construction. China’s growth and increased global trade volumes are helping to sustain solid growth in trade-dependent Asian economies.

NZ’s export volume growth is forecast to strengthen to about 4% in the year ahead, although much of this strength reflects a rebound in goods exports in the June 2017 quarter.

The outlook beyond this is for exports to grow a little over 2% a year, somewhat below their long-run average, as the relatively high exchange rate constrains profitability. But high commodity export prices provide an offset to the high exchange rate for some sectors.

Uncertainty around the terms of trade is always a big issue for exporters. Changes to regulatory settings in key overseas markets can have significant impacts on global supply and the price of NZ’s goods. The PREFU says a stronger international outlook, however, would likely increase demand for exports, resulting in higher terms of trade.

Our terms of trade have been trending upwards since the early 2000s. They probably improved in the June quarter but are expected to decline later this year, partly reflecting recent falls in dairy auction prices.

But they are expected to remain a little higher than previously forecast, largely because of improved prospects across several export commodities and a weaker outlook for oil prices.

Dairy, meat and forestry prices are all benefiting from stronger demand in China and from regulatory restrictions on alternative sources of supply. But a word of warning is sounded: high levels of debt in China may lead to a tightening in financial conditions which slows growth and reduces demand for NZ’s exports.

Former PM John Key criticised a long-term fiscal forecast by Treasury in November last year, saying “it’s a load of nonsense, because they can’t get predictions in 44 days right, let alone in 44 years.”

Key said the assumptions used in making the predictions - if nothing changes in policy, this is what is going to happen - were flawed. His point is well made; the course of the economy will depend on many events and how the Govt responds to them.

Trans Tasman’s sister publication, The Main Report Farming Alert, is a weekly source providing you with in-depth news, analysis and opinion on NZ’s agriculture sectors.

ENDS

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