It’s been a tough old day for the Reserve Bank of New Zealand (RBNZ) with some disappointing data out of New Zealand over the last 24 hours. A rate cut might seem the logical answer to combat a slowing domestic market, but a scorchingly hot property market will make the decision an impossible one.
The unemployment figures out today paint the situation rather simply; the economy in New Zealand is heading for a downturn. Unemployment ticked higher from 5.7% to 5.8% while the market was, rather optimistically, hoping for 5.5%. The employment change also disappointed at 0.7% q/q, down from 1.2%. The trend is a concerning one for the RBNZ, with unemployment rising from a low of 5.4% in November 2014.
Dairy is New Zealand’s largest export (at 29%) and the global dairy trade has just returned another disappointing result. The Global dairy trade auction fell -3.5% for the 4th negative result running, and the index is at its lowest since the 4th August 2009. There had been some hope that the index would find support early on this year as they lifted from a low of 739, but they only managed to hit 965 in March and are now floundering at 730. Export receipts are also likely to take a hit in the months to come. Fonterra added to the pain as it reduced its forecast on milk pay-out to farmers, as the seller passes on the lower prices to the producers.
Many of New Zealand’s trading partners are facing their own troubles which is likely to hurt exports further. China is facing a slowdown and the PBOC has tried to keep the party going as they cut their Reserve Ratio Requirements (RRR) which means banks have to hold less cash, therefore have more to lend.
Australia is being affected by China with the mining sector taking the brunt of the headwinds. Iron ore has fallen from $120.00 a tonne at the beginning of 2014 to as low as $46 in early April. Unemployment is ticking higher in Australia and the RBA cut interest rates for the second time this year in order to stem the seemingly inevitable recession.
That’s the rock, the hard place is the Auckland property market. If the RBNZ cuts interest rates to boost domestic demand, the first place that will see the benefits is the mortgage market. Demand for housing in Auckland has driven prices up so high the average is now $800k, 13.5% higher than a year ago. This is no one-off, prices are 23% higher than two years ago, and nationwide the average growth is 7.5% per annum.
A rate cut will be akin to pouring petrol on an already raging fire. The RBNZ has previously stated it would look at macro-prudential measures that would limit the lending to property investors, so that first home buyers would not be priced out. The RBNZ estimates the Auckland market to have an undersupply of 15-20,000 dwellings which is fuelling the growth. Immigration is certainly adding pressure to the demand side, with 75% net migration growth in the year to March 2015, from 32k to 56k migrants. The vast majority of migrants settle in Auckland.
Who would want to be a central banker? On one hand you have very real threats to the economy in the form of weaker export receipts, rising unemployment and downturns expected in the economies of your major trading partners, and on the other hand you have a red hot property market that threatens to turn into a bubble if interest rates are cut. This is the challenge RBNZ Governor Graeme Wheeler faces, and I for one do not envy him.