We Should Increase The Intensity Of Fiscal And Monetary Policies

• “We should increase the intensity of countercyclical adjustment of fiscal and monetary policies,” Chinese officials say. The Chinese economy continues to struggle and faces deflationary pressures. Officials will come to a “whatever it takes” moment, soon.
• Despite the weakness of our largest trading partner, Fonterra is creaming it. Debt levels are down, profits are up, and a massive dividend was paid. Great news for dairy farmers and rural NZ.
• The next RBNZ monetary policy announcement is coming around quickly, on October 9th. We advocated for a cut in August, and now we’re advocating a 50bp cut in October and November. Why not? The economy needs it.

Here’s our take on current events

Chinese officials boosted stock markets last week, with the promise of more stimulus. The Fed’s 50bp cut the week earlier, has enabled the Chinese central bank to move as well. But if Chinese officials are to come close to their 5% growth target, they need to get more heavily involved. The Chinese economy has been floundering around for too long. The property market crisis, which has weighed on domestic household spending, has seen the PBoC deliver savage interest rate cuts and billions in funds to restore confidence and activity in both property and share markets. Local economists deem the moves as positive, but falling short of what is required to reflate the economy. Chinese officials will need to have a “whatever it takes” moment, announcing bazooka-sized spending aimed more at households (middle-income) and not so much on infrastructure (as they have done in the past). And or allow a faster devaluation in the Yuan. Chinese officials know too well that the property market and share market are measures of success, but more importantly, social stability.

Our chart highlights two underperforming equity markets. The Kiwi stock market has underperformed our friends across the Tasman, and most international benchmarks, including US markets. But our underperformance is not so bad when compared to China. Even with the 13% policy induced spike last week, China’s stock market remains down 40% from the peak in 2021. That’s four years…

In what was a welcome development, Fonterra is paying its second largest dividend in its history, at 55c. More importantly, its forecast Farmgate milk price is $9 per kgMS, within a forecast range of $8.25-$9.75 per kgMS. The solid result and forecast, despite mixed demand out of China, is good news for dairy farmers and rural New Zealand. According to CEO Miles Hurrell, the solid result is a “couple of years of catch up” following difficult times, and will enable farmers to get back into some capital expenditure.

This week, we will learn more from Kiwi corporates, with the NZIER’s quarterly survey of business opinion. Since the RBNZ’s August rate cut, business leaders have become much more upbeat, and willing to approach 2025 with a spring in their step. We expect to see a jump in confidence, but we will need to see how that feeds into activity. The future path for monetary policy will play a big role.

We took a quick poll of our dealers and traders, and most respondents (65%) went for a 25bp cut in October and a 50bp cut in November. There is a long wait between November’s decision and the first for 2025 in February. November is like a double decision. Interestingly, 30% are for two 50bp cuts in October and November. The no mucking around option. Only one person thought the RBNZ should cut 25bp in October and November, as planned.

We continue to advocate harder and faster 50bp rate cuts in October, and again in November.

It takes up to 18 months for rate cuts to filter through the economy. We all love fixed rates. And fixed rates need time to roll off.

Charts of the Week: China is our largest trading partner, by far.

According to StatsNZ: “In the June 2024 quarter New Zealand exported $5.38 billion of total goods and services to China, People's Republic of and imported $4.07 billion, representing a trade balance of $1.31 billion and a total trade value of $9.45 billion. This represented 20.5% of all exports of total goods and services in this time period and 15.9% of imports. For trade in total goods and services China, People's Republic of ranked 1 of 225 for highest export value, 2 of 232 for highest import value, and 1 of 241 for highest total trade value.”

The strong trade surplus with China was driven by agriculture, tourism and education (Chinese students studying in our universities). Dairy was our top export, think Fonterra. And Machinery was our top import.

So what scares us most? Geopolitical tensions in our backyard. If tensions kick off between the US and China, we find ourselves stuck between a rock (US) and a hard place (China). China is our top export destination, the US is our second. And any misstep could see China threatening our agricultural and tourism exports (and trade in general). This is not a new fear. We ranked Geopolitics as our number one fear a decade ago. And (trade) wars remain top on our list.

Our second largest trading partner is Australia. Our trade with Australia is dominated by tourist flows, both ways. And they too would face similar threats from China (they already have) if tensions kicked off in the pacific.

What is the solution? Diversification… we need to seek growth elsewhere.

India is a big part of the solution. India will be the fastest growing developing economy for many years… It’s great to hear we are pursuing better trade agreements with India. We have been for well over a decade.

The rest of Asia, and eventually Africa, will also be a source of growth.

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