Fieldays Focus: Tony Alexander’s economic outlook

BNZ’s Chief Economist, Tony Alexander reflects on the economic conditions impacting New Zealand’s agribusinesses right now.

At Fieldays this year there are two things I expect to be foremost in farmers’ minds, and two other important things which used to dominate thinking, but have been pushed somewhat into the background.

Of immediate concern to many farmers are difficulties attracting and keeping labour. Unfortunately, this situation is unlikely to change given that in virtually every other sector in the economy businesses are also struggling to get and keep the staff they want. For that reason, farmers are likely to be thinking about technology and equipment with a labour-saving focus when strolling the display grounds this year.

The other big concern is the need to address issues of climate change and broader environmental impacts. Farming in New Zealand has a long history of changing land use in response to changes in markets, and returns for different commodities. So, changing what and how things get done in response to the need to address environmental concerns is virtually certain to occur. But change in the past usually took decades and that is going to be the case for the new farming focus as well.

So, my other expectation for Fieldays is that farmers will be looking for equipment and techniques which they can slowly introduce over time to change the way they do things at the margin.

The other two big uncertainties which dominated in the past but occupy less time and thought these days are interest rates and the exchange rate. 

Around the world over the past ten years, even in economies like New Zealand, Australia, the UK, and US, where growth has been good and unemployment rates are exceptionally low, wages growth has failed to take off and inflation has remained subdued. In fact central banks are still more worried about inflation staying too low than bouncing back up to high levels. This is something very new for those of us who have been around monitoring such things for the past three or four decades.

The way wages respond to labour market pressures has changed and there is no indication anywhere that the old upward pressures are about to return outside some specific sectors like construction. And the ability of businesses to raise selling prices even if costs like wages do jump up seems to have structurally changed.

The easy ability with which consumers can find online alternatives to the products businesses are selling means that raising prices and getting away with minimal customer desertion is near impossible.

Sustained low inflation means sustained low interest rates, and in recent months around the world the popular expectations for monetary policy changes have completely reversed direction. Instead of rises being expected, cuts are now on the cards. In fact, contrary to expectations back in spring, we have already seen interest rates reduced in Australia and New Zealand. More cuts are highly likely.

With regard to the NZ dollar, there is good support from the terms of trade for New Zealand which are only just down from record levels. But there is an absence of the high interest rates attracting foreign investors to our currency, which has been a factor so often in the past. At around US 66 cents the Kiwi dollar is comfortably down from 74 cents early in 2018. Further decline is not highly likely given that US monetary policy looks highly likely to be eased more than NZ policy over the coming year. But a return above 70 cents does not yet look imminent.

Any views expressed in this article are the views of Tony Alexander and do not necessarily represent those of BNZ, or its related entities. The information is provided for general information purposes only, and is a summary based on selective information which may not be complete for your purpose.