Record payments to dairy farmers and a China-led trade turnaround added to evidence New Zealand will outpace developed-world peers this year, cementing bets the central bank will raise interest rates in two weeks.
Fonterra Cooperative Group Ltd. (FSF), the world’s biggest dairy exporter, increased its forecast milk payout to farmers to a record today as data showed demand from China helped New Zealand record its first 12-month trade surplus in almost two years. A separate report showed the highest level of immigration in a decade, while the national airline posted record first-half earnings.
“The economy is doing extremely well,” Air New Zealand Ltd. Chief Executive Christopher Luxon said on a conference call from Auckland. “We see it in the regions, we see it in the numbers. We’re feeling very, very confident.”
Dairy exports to China, inward migration and the rebuilding of earthquake-damaged Christchurch are all combining to drive one of the fastest rates of economic growth in the developed world. With inflation pressures mounting, the Reserve Bank of New Zealand is poised to start raising rates from a record low on March 13, fueling gains in the local dollar.
The so-called kiwi jumped a quarter of a U.S. cent today after Fonterra raised its forecast payout to farmers to NZ$8.75 per kilogram of milk solids, citing strong demand for milk powder. The currency traded at 83.30 U.S. cents at 3:12 p.m. in Wellington, just five cents below its post-float record.
“The expansion is pretty broad based, driven by multiple factors, and dairy revenue is a big one,” said Doug Steel, an economist at Bank of New Zealand in Wellington, who estimates dairy income will jump by NZ$5.6 billion ($4.7 billion) this season, the equivalent of about 2.6 percent of gross domestic product. “Obviously that’s a massive impulse to incomes, the economy, and to narrowing the current account deficit, as we’ve seen in the trade accounts,” Steel said.
Exports to China soared 92 percent in January to NZ$1.2 billion, helping New Zealand post its first 12-month trade surplus since March 2012, Statistics New Zealand said today. Sales to China, New Zealand’s biggest trading partner, jumped 54 percent in the year through January to NZ$10.6 billion.
Separately, the statistics agency said permanent immigration was 25,666 in the 12 months ended January, the most since April 2004.
Accelerating economic growth is boosting earnings and pushing business confidence to a 15-year high.
Firms including Fletcher Building Ltd. (FBU), Steel & Tube Holdings Ltd., Skellerup Holdings Ltd. and Auckland International Airport Ltd. posted increased profits last week. Air New Zealand today reported first-half normalized pretax earnings rose 29 percent to NZ$180 million and predicted a full-year result of more than NZ$300 million, with Luxon saying the airline is entering an “aggressive growth phase.”
By contrast, Australian carrier Qantas Airways Ltd. reported a first-half loss of A$252 million ($226 million) today and said it will cut 5,000 jobs.
Economic growth will accelerate to 4.2 percent this year, Westpac Banking Corp. predicted this month, propelled by the NZ$40 billion rebuild of Christchurch and record-high terms of trade.
BNZ’s Steel said while risks to the economic outlook are on the upside, there are some concerns that a tightening labor market will make it challenging for companies to meet demand.
“One of the issues we see is the ability to find the resources to actually make this growth happen,” he said. “The labor market looks to be tightening as we speak. So while the demand impulse is there, it might be a bit of a challenge to get on and do it.”
Markets are certain that RBNZ Governor Graeme Wheeler will raise the Official Cash Rate from 2.5 percent on March 13, according to interest-rate swaps data compiled by Bloomberg. There’s an 89 percent chance of a quarter-point increase and an 11 percent likelihood of a half-point move.
“The OCR needs to move up soon,” senior ANZ Bank economist Mark Smith wrote in a note to clients. “We envisage 75 basis points of hikes over the first half of 2014, starting in March.”
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