Coming up Trumps? · as oil prices recover to ~$50US/bbl. Leads to more production ~ 6 months. And constrains prices. Makes a dramatic recovery in oil prices difficult. 0 500 1000

Coming up Trumps? Nick Tuffley – ASB Chief Economist

November 2016

2

Disclaimer

This document is a private communication and is not intended for

public circulation or for the use of any third party, without the

approval of ASB. The information contained in this document is

given with an express disclaimer of responsibility. No right of

action shall arise against ASB or its employees either directly or

indirectly as a result of this information. Those acting upon this

information do so entirely at their own risk. This information

does not purport to make any recommendation upon which you

may reasonably rely without taking further and more specific

advice.

https://www.asb.co.nz/section177.aspx

3

Topics

• Global outlook

• Housing, construction

• NZ overview

• Inflation, interest rates, NZD

4

Brexit: opted out

5

Brexit impacts on NZ

• 5% of NZ s total trade exports. • Meat, tourism and wine the

main export exposures.

• Lost competiveness on

exchange rate.

• Slower UK growth as Brexit

decision starts to impact

investment and employment

decisions. 2%

4%

6%

8%

10%

12%

14%

15%

20%

25%

30%

35%

40%

45%

Jan-99 Jan-02 Jan-05 Jan-08 Jan-11 Jan-14

SHARE OF NZ GOODS EXPORTS

Europe (rhs)

Asia ex-Japan (lhs)

UK rhs)

6

Global picture

https://www.google.co.nz/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwio9bTb1rfLAhVlL6YKHWm6DMUQjRwIBw&url=https://www.pinterest.com/degivens11/political-cartoons/&bvm=bv.116636494,d.dGY&psig=AFQjCNGvWk1Zvp_bhRU58mXcQyUmv8-W5A&ust=1457752284526504

Broad global outlook

-6

-4

-2

0

2

4

6

8

10

Dec-00 Dec-04 Dec-08 Dec-12 Dec-16

NZ TRADING PARTNER GDP GROWTH

Source: Consensus Inc, Stats NZ, ASB

Asia ex-Japan

US

Australia

aapc

Euro area

-2

0

2

4

6

8

85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17

NZ TRADING PARTNER ANNUAL GDP GROWTH

Source: Consensus Inc, Stats NZ, ASB

aapc

Av erage

2016 & 2017: Forecasts

8

Oil down (and up)

• Oil prices remain subdued:

– Concerns over global/

Chinese economic growth

– Supply still strong

– Storage levels high

• US the swing producer:

exploration lifts as oil

approaches $US 50/barrel.

• In time, lower prices will

support global growth.

0

20

40

60

80

100

120

140

160

0

20

40

60

80

100

120

140

160


USDDUBAI OIL PRICE

Source: Bloomberg

USD

9

Widespread oil production lifts

• OPEC accounts for around 1/3

of global production.

• Removal of sanctions on Iran,

disagreement among

members have seen

production continue to lift.

• US produces around 10% of

global oil.

• US production has fallen

recently in response to low oil

prices.

• But remains in the wings.

25000

26000

27000

28000

29000

30000

31000

32000

33000

34000

35000

2000

3000

4000

5000

6000

7000

8000

9000

10000


OIL PRODUCTION(000's barrels a day)

Source: Bloomberg

US Oil Production (LHS)

OPEC Oil Production

10

Oil price lifts limited

• US drilling exploration lifting

as oil prices recover to

~$50US/bbl.

• Leads to more production ~ 6

months.

• And constrains prices.

• Makes a dramatic recovery in

oil prices difficult.

0

500

1000

1500

2000

2500

0

20

40

60

80

100

120

Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16

$US/bblOIL PRICE AND US DRILLING

RIG COUNT

Source: Bloomberg

# rigs

Rig Count

Oil Price

11

Milk price forecast

• Current season approx. $6/kg

– NZD rate better.

– But contingent also on

sharply firmer USD prices

over NZ spring.

• Fonterra revised up its

forecast to $5.25/kg from the

initial $4.25/kg.

0

1

2

3

4

5

6

7

8

9

10

05 06 07 08 09 10 11 12 13 14 15 16 17 Long Run

MILK PRICE AND DIVIDENDS(per kg milksolid)

Source: Fonterra, ASB

$

ASB Milk Price forecasts

Milk Price

Dividend

Fonterraforecast

12

Tourism booming • 2015 spend yoy$2.3bn, 31%

– Visitors 14%

– Spend per visitor 19%

• Short-term drivers

– Lower NZD, fuel prices

– US growth recovery

– Airline capacity

– Hobbiton

• Long-run drivers

– Chinese middle-class growth

– Tech e.g. Dreamliners &

internet innovation

170

190

210

230

250

270

290

05 06 07 08 09 10 11 12 13 14 15 16

NZ SHORT TERM ARRIVALS(monthly, seasonally adjusted)

Source: Stats NZ

'000

Lions tour

RWC

CWC

13

Strong population growth through migration

• Net migration at record highs.

• Fall in permanent departures

while Australian job

opportunities were muted.

• Increased permanent arrivals,

returning NZer s from

Australia and skill shortages

attracting foreign labour.

• Students (Indian and Chinese).

• Moderation expected, as Aust

vs. NZ prospects eventually

shift, student flows become

more two-way.

-20

-10

0

10

20

30

40

50

60

70

80

Mar-95 Mar-99 Mar-03 Mar-07 Mar-11 Mar-15 Mar-19

000s NET MIGRATION

Source:Stats NZ, ASB

Net migration (annual)

14

Housing, construction

15

LVRs: Auckland house prices stretched

20

40

60

80

Jun-98 Jun-03 Jun-08 Jun-13 Jun-18

MORTGAGE REPAYMENTSOF A FIRST HOME BUYER

% H/H INCOME(25 year, 20% deposit)

Source: RBNZ, REINZ, ASB estimates

NZ

Auckland

4

6

8

10

4

6

8

10

Jan 00 Jan 05 Jan 10 Jan 15

TotalAucklandCanterburyWellington

HOUSE PRICE TO INCOME

Source:StatsNZ, REINZ

16

New housing restrictions

• 3rd round of LVR restrictions

started on 1 Oct.

• 40% LVR for investors.

• 20% LVR for owner-occupiers

(for all but 10% such loans).

• But some exemptions:

– New builds purchased from

developer (<6 months old).

– Remediation or to comply

with new rental property

standards.

– O-Os using HNZ Welcome

Home Loan Scheme.

17

Regional house listings, sales

-1000

1000

3000

5000

7000

9000

0

1000

2000

3000

4000

5000

Jan-07 Jan-12

MONTHLY DWELLING SALES(seasonally adjusted)

Source: REINZ, ASB

No.

Canterbury

NZ (RHS)

Auckland

Wellington

No.

0

10,000

20,000

30,000

40,000

0

5,000

10,000

15,000

20,000

Jan-07 Jan-09 Jan-11 Jan-13 Jan-15

Source: realestate.co.nz

Auckland (LHS)

TOTAL INVENTORY

NZ excluding main cities (RHS)

Canterbury (LHS)

Wellington (LHS)

18

Housing market

• Impact from Govt and RBNZ

investor restrictions wore off

in Auckland by March 2016.

• Auckland halo effect impacting rest of NZ.

• House price growth picking up

in many regions.

• Wellington very strong.

• New restrictions: flat/falling

prices in late 2016, bounce in

2017H1.

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%


REGIONAL HOUSE PRICE FORECASTS (annual growth)

AKL

CHCH

WGTN

Other

Nationwide

Source: QV, ASB(f)

ASB f /c

19

Building outlook

0.2

0.6

1.0

1.4

1.8

2.2

Jun-88Jun-92Jun-96Jun-00Jun-04Jun-08 Jun-12Jun-16

NON-RESIDENTIAL BUILDING(quarterly)

Source: Stats NZ, ASB est

09/10 $ b

(f)

0.7

1.2

1.7

2.2

2.7

3.2

3.7

4.2

4.7

Jun-88 Jun-92 Jun-96 Jun-00 Jun-04 Jun-08 Jun-12 Jun-16

RESIDENTIAL INVESTMENT(quarterly)

Source: Stats NZ, ASB est

95/96$ b

(f)

20

NZ snapshot

21

Consumer spending reasonable

• Consumer spending growth

supporting overall growth.

• Low inflation relative to wages

boosting disposable income.

• Strong population growth

adds to momentum still in

near term.

• Dairy income constraint over

the next year in provinces.

-4

-2

0

2

4

6

8

-4

-2

0

2

4

6

8

Sep-90 Sep-95 Sep-00 Sep-05 Sep-10 Sep-15

CONSUMPTION & QES REALGROSS EARNINGS

Real gross earnings

Consumption

apc apc

(f )

Source: StatsNZ

22

Growth moderated in 2015, back up in 2016-17

• Growth slowed in 2015.

Weaker dairy incomes and

production and flattening in

construction.

• Low interest rates and past fall

in NZD will support recovery in

growth over 2016.

• Beyond dairy, export outlook

is promising.

• Population and income

growth to remain key supports

of NZ economy.

-3

-1

1

3

5

7

-3

-1

1

3

5

7


NZ GDP GROWTH

Source: Stats NZ, ASB

%

(f)

%

Annual av erage %

Per quarter

23

Inflation, financial markets

24

Inflation low for an uncomfortably long time?

-1

0

1

2

3

4

5

6

Jun-00 Jun-03 Jun-06 Jun-09 Jun-12 Jun-15 Jun-18

NZ CPI INFLATION


%

(f)

Annual %

quarterly change0

1

2

3

4

Mar-93 Mar-98 Mar-03 Mar-08 Mar-13 Mar-18

NZ CPI ANNUAL INFLATION3-year average


%

(f)

CPI Annual %

CPI Inflation Target Band

25

Interest rates low for a long time

• One more cut in November to

1.75%.

• Inflation outlook suggests

OCR risks skewed to an even

lower outcome.

• Funding costs, deposit

challenges:

– Behavioural changes

– Deposit growth slowing

– Added pressure on cost of

funds

1.5

2.0

2.5

3.0

3.5

4.0

1.5

2.0

2.5

3.0

3.5

4.0

Sep-13 Aug-14 Jul-15 Jun-16 May-17 Apr-18 Mar-19

Source: ASB

% OCR FORECASTS

(ASB vs pricing of overnight index swaps) %

Current market pricing

ASB Economics Forecast (peak of 3.5% in 2022)

26

NZD forecasts

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00


NZD/USD and NZD/AUDUSD AUD

(f)NZD/USD (LHS)

NZD/AUD (RHS)

40

60

80

100

120

0.40

0.50

0.60

0.70


NZD/EUR and NZD/JPYEUR JPY

(f)

NZD/EUR (lhs)

NZD/JPY (rhs)

27

Summary

• Trading partner growth OK – but a diverse range of

uncertainties.

• NZ economy set to pick up to 3+% growth over next 2 years.

• Growth will be supported by migration flows, tourism,

construction, low interest rates and NZD, real wage growth.

Dairy cashflows under pressure until 2017H2.

• Housing: lending restriction impacts, some bounce next year,

then settling to a moderate pace.

• Inflation pressures are low, and we expect the RBNZ to cut the

OCR to 1.75% in November. Risk is an additional cut in 2017.

Documents

Coming up Trumps? · as oil prices recover to ~$50US/bbl. Leads to more production ~ 6 months. And constrains prices. Makes a dramatic recovery in oil prices difficult. 0 500 1000