Investors in shares and businesses exposed to mineral commodity prices have started the year on a bad note with some major price declines – record New Year falls in share prices in fact.
The MSCI measure of global equities is almost officially into a 20% decline bear market from the peak last May and last month, the Dow Jones shed another 1.3% to be down 9.5% since December 31 and 14% from the May peak.
The rout has been caused partly by worries about the Chinese economy, the lack of success of the authorities there in supporting growth, and recent ham-fisted efforts to stem the correction in Chinese share prices from unrealistically high levels.
China’s economy is transitioning from dependence upon exports, manufacturing, and fixed asset investment toward private consumption.
However, while the former phase is underway the latter remains elusive and no-one knows when household spending will truly take over as the main growth driver.
But before it does so, there could be long-lived ructions associated with excess capacity, high debt, bloated state-owned enterprises, and financial reregulation.
Middle East worsens
Conditions in the Middle East are also worsening whether measured by the deteriorating relationship between the two major players of Iran (Shite) and Saudi Arabia (Sunni), the war waged by ISIS across much of the region, Libya’s instability, the continuing Israeli occupation and intifada, Turkey’s fight with the Kurds, or plummeting oil receipts.
The European Union continues to show more signs of friction and falling apart than smoothing of disputes and cohesiveness against threats from Russia, terrorists, millions of culturally alien refugees and economic migrants.
Borders are being reinstated, recently agreed fiscal rules are being resented and broken, the UK will vote on discontinuing EU membership, the Euro is still at risk of falling apart if Greece again needs more bailout money, and strongly regulated economies are poorly placed to adapt in a world where adaptability to change is more vital than ever before.
The American and Australian economies have some good underlying momentum with strong jobs growth in both and the Australian services sector and tourism helping offset the worsening minerals sector downturn.
But the effect and pace of US monetary policy tightening which started in December 2015 is a huge source of uncertainty facing the global economy this year, especially with regard to capital flows out of struggling and shrinking emerging economies.
Cause for optimism
Yet as we emphasised last year, New Zealand has plenty of reasons for not getting pessimistic about the impact of events offshore.
House construction continues to grow with annual consent numbers now at a ten-year high of 26,800 compared with only 13,500 in the middle of 2011.
The value of non-residential building consents now stands at a record $5.8 billion compared with $3.8 billion three years ago.
The tourism sector is booming with visitor numbers ahead by 9% in the past year and spending ahead a massive 38%. Most non-dairy exports are doing well.
El Nino (a phenomenon of continuous warming of surface sea temperatures in the Pacific Ocean) is even proving less severe in its impact than feared, though it remains a risk to agricultural production levels.
Business confidence up
Business confidence has just improved according to the quarterly survey of the New Zealand Institute of Economic Research (NZIER) to a net 15% optimistic from -15% in the September quarter and an average of +6%. A net 14% of businesses plan boosting staff numbers versus an average 6%.
A net 10% plan boosting investment compared with an average of 2%.
There is support for growth from the slowly weakening New Zealand Dollar, and the low interest rates are acting as a stimulus.
We learnt that inflation for calendar 2015 was not 0.3% as forecast but only 0.1%, courtesy of the December quarter average cost of living falling 0.5% rather than the expected 0.3%.
The chances of even further monetary policy easing in New Zealand have risen, the currency edged lower following the data release, and low interest rates look set to be with us for many, many years.
Let us throw booming net immigration into the mix – now at a gain of almost 64,000 in the year to November – and we see good growth ahead this year for the economy.
In other words, our central message last year of many factors underpinning New Zealand growth has not changed, even taking into account the share market wobbles, downside risk to dairy prices, and deeper worries about China’s economy.
Businesses should continue to seek out good staff. Construction, retailing, tourism and the services sectors are likely to perform well, funding costs will stay low and perhaps decline further, and the NZD will be somewhat suppressed in spite of good New Zealand growth by China worries and weak global commodity prices.
BNZ is the Title Sponsor and Sponsor of the ‘Best Large Business’ and the ‘Supreme Business of the Year’ of the Indian Newslink Indian Business Awards 2016