© Thu Lan Nguyen
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New Zealand is a small open economy, hence, it does benefit from international trades and, therefore, if the G20 countries are putting an effort in lifting growth potential, then it is clear that New Zealand would be in advantage. I cannot say if the extra 2.1% are realistic, as there are many risks that economy is facing from within, as well as externally. For one, New Zealand is quite reliant on the Chinese economy, where currently there are huge uncertainties regarding the housing sector. This risk is a major problem to their domestic economy, and therefore, to any other country, which has close trade relations with it.
Talking more broadly about the risks from within – New Zealand is a typical commodity-exporting country, which is highly focused and reliant on the commodity sector, with other sectors being less productive. Hence, it is true that politicians will have to implement structural reforms, in order to support the non-commodity sectors, because as shown by present times, you cannot rely on one sole sector. The boom in the commodity sector is coming to an end, which is also related to the fact that the Chinese economy is slowing. Now than ever, there is a need for countries like New Zealand and Australia to diversify away from the commodity sector and strengthen the entire economy rather, then its particular parts. Thus, I believe this is a necessary goal for the officials for the next couple of years, as we do not know how the commodity sector will evolve, alongside with the Chinese economy.
Official figures show a net gain of 5,200 people in October, as a fast-growing economy attracts foreigners looking for work, while also keeping more New Zealanders at home. In November the Reserve Bank said it was too early to lift restrictions, since a surge of immigration could push up house prices. Does the foreigners increase mean limits on low-deposit lending would stay for longer? To your mind what economic consequences may New Zealand face in the short and long run from such a big immigrant number?
I believe that the Reserve bank of New Zealand main concern right now is inflation, which has fallen to the lower end of its target range of 1% to 3%.Certainly, when there is a downtrend in the economy and factors that are additionally dampening inflation, e.g. the mentioned immigration - then that is a concern for the central bank right now, and a reason to keep interest rates at lower levels.
Low inflation is, however, a global phenomenon. Thus, it would go too far saying that it is mainly stemming from the immigration factor. There are plenty of other reasons, e.g. commodity prices came down significantly and the economy is generally still in a recovery phase.
What will be the major headwinds for New Zealand Dollar until the end of the year and in the beginning of 2015?
The main focus will be increasingly turned to US monetary policy. We have already seen quite a lot of Dollar strength over the past half year. This was also the main reason why the Kiwi has weakened significantly against the greenback and we anticipate seeing this tendency throughout the next year. Markets are slowly, but surely beginning to price in the normalization of US monetary policy.
However, the market is still relatively cautious by pricing in only one rate hike by the end of 2015 at the moment. We think this is, certainly, underestimating the timing and the extent of the US rate hike cycle, since the US economy is recovering quite strongly. The Fed is near its' targets, which it has not been for quite a long time. Therefore, all of this speaks for a more aggressive rate hike cycle than market is currently pricing in. It means that there is a prospect for a significant Dollar correction, which will be a major driver on FX markets and eventually also pull the NZD/USD down.
What are your forecasts for NZD/USD and EUR/NZD in the long term?
We expect to see the NZD/USD at 0.70 levels by the end of 2015 and 1.64 to be the target for the EUR/NZD pair.