New Zealand: Risk Assessment
Country Rating1
Rating: A1
Business Climate Rating1
Rating: A1
Risk Assessment2
Growth was affected in 2010 by the Christchurch earthquake
The earthquake that occurred in the Christchurch region in September 2010 affected the economic environment in 2010. But even before that catastrophe, economic growth was already sluggish. Household consumption was supported mainly by tax cuts while investment only recovered moderately after the sharp contraction in 2009. Exports benefited from the dynamism of demand from Australia and Asia and the rise in raw material prices. But with an even sharper increase in imports, foreign trade nonetheless made a negative net contribution to GDP growth.
Debt repayment by households and companies will limit growth in 2011
The economy will grow in 2011 but remain constrained by the debt-repayment focus of households and companies while government authorities undertake to consolidate public-sector finances. Government spending will nonetheless continue to spur a still tentative economy. With three quarters of the wealth of households associated with their property holdings, however, their confidence will be eroded by the stagnation, or continued decline in the value of their homes. Wage growth will moreover remain weak, a tight job market notwithstanding. Households will thus be likely to exercise vigilance and cut spending while replenishing their savings. Residential and public-sector investment is expected to rebound in the wake of the efforts to reconstruct infrastructure and housing destroyed in the earthquake. The cost of the reconstruction has been estimated at USD 3 billion, or 2% of GDP. Like households, companies will exercise prudence in undertaking productive investments. The holding of the World Cup of rugby this autumn will nonetheless provide support, albeit temporary, for private spending and tourism. Despite high raw material prices, exports will continue to make a negative net contribution to growth, and the current account deficit will widen slightly. After hiking its key rate twice since June 2010, the Reserve Bank of New Zealand is expected to refrain from any further increases in 2011 to avoid choking off the weak recovery. Fiscal policy will be less expansionary this year, which will facilitate reductions in the public-sector deficit with government debt growing from 25% of GDP to a nonetheless reasonable 32% of GDP.
The New Zealand dollar appreciation will erode margins of export companies
With New Zealand's economic model refocused on exports, the economy is even more sensitive to exchange rate movements than in the past. The trend of the New Zealand dollar in relation to the currencies of the main trading partners (Australia, China, Japan, United States) will thus bear watching. The appreciation of New Zealand's currency will particularly affect exporters of livestock and manufactured products, which have not - contrary to the textile and dairy sectors - benefited from a rise in prices. In the domestic market, retailers and related sectors will likely suffer from the prudence exercised by households. Moreover, since they may not always be able to pass on to customers the tax increase on goods and services, their profits may decline accordingly. The construction industry will remain buoyant thanks to projects associated with the earthquake and planned infrastructure spending. The expansion of credit to companies will be limited as they continue to focus on paying down their debt. Bankruptcies have eased in 2010, down 36.5% over the 12-month period ending June 2010 and the trend continued over three months.
Investment related to the reconstruction effort after the Christchurch earthquake represents 2% of New Zealand's GDP.
Strengths
- High birth rate
- Net positive immigration
- Geographic proximity to emerging Asia and Australia, dynamic regional environment
- Tourist attractions
- Solid banking system, public sector finances relatively unscathed by the crisis
- Control over 90% of New Zealand’s dairy resources and 30% of global dairy exports by one cooperative (Fonterra)
- Low public sector debt
Weaknesses
- Large current account deficit
- High foreign debt (over 130% of GDP)
- Negative savings rate
- Heavy household and corporate debt burdens
- Dependence on world agricultural markets and their volatility
- Small size economy dependent on foreign investment
- Shortage of skilled manpower