Rural Heartland

Let us take our hats off to all the good people in rural heartland New Zealand, and especially those in the Eastern Bay of Plenty.  You do a fantastic job, and are world renowned as efficient and effective farmers and orchardists.  For years you have been working to increase revenue and profits through increased scale and production per hectare. 

World prices in US dollars for the commodities that you produce have generally been running in your favour. The high exchange rates together with high interest rates have taken the gloss off those prices.  In recent months commodity prices have corrected downwards by around 4% below their May peak as the global economic growth cycle starts to mature. 
 
The New Zealand economy is very unbalanced.  The export sector is in trouble because of the high exchange rates.  The domestic economy just seems to keep powering along, boosted by high spending and high debt. There is now an unsustainable level of $112 of spending for every $100 earned.

However, the economy has slowed, and may grow at below average growth rates for the next couple of years.  Therefore it is no surprise that business confidence in the economy is at a 17-year low.  Our unbalanced economy has seen the current account deficit explode out towards 9% of GDP with imports (spending) far exceeding exports (revenue). 

Most economists are predicting large drops in the New Zealand dollar relative to other currencies over the next two years.  This is the natural response to bring the current account deficit down. This should be advantageous for the rural heartland, as it will favour exports, and make imports more expensive. 

Dr. Bollard, while increasing interest rates again last week, made the unusual comment of questioning why overseas investors continue to invest in New Zealand when there was a real risk they would lose money when the dollar falls. It is not a matter of if the dollar falls, but of when. Major global investment banks are warning their clients that the New Zealand dollar is overvalued, and that they should sell the currency before it falls.

Fortunately or unfortunately as the case may be, large amounts of New Zealand dollars are effectively held by Japanese housewives. They have been sold high interest bearing New Zealand dollar investments, and may not have had the exchange rate risk disclosed to them by the financial institutions that sold them the investments.

Many of those in the rural heartland will have experienced these economic cycles before and will have made adjustments in spending while trying to still be more productive.  The domestic economy could learn some lessons from you because as you know, increased productivity and innovation are two of the keys to creating sustainable wealth in the future.