Financial Outlook

The year 2008 has been a challenging year not only in the States or Europe but also in New Zealand. The global financial situation has taken a dramatic turn and the governments from US and Europe are taking measures to ease the situation. Some of these measures include making more cash available and injecting capital into banks in need of it. These measures were introduced to reach two primary goals: keeps those that have trouble running and give everyone enough confidence to overcome the current situation.

The first positive signs can already be seen in some US and European markets which slowly start to defrost. But obviously it will still take quite a while till everything is back to normal.
Interestingly, the lack of money in the system shows to be a much bigger problem than the price of money. Therefore it is important to restore confidence in investors to recover from the situation. To achieve this it is important to increase liquidity, ensure deposits and wholesale funding of banks and inject capital into key banks.

Obviously the ongoing financial crisis has a freezing effect on credits which will remain tight and constrained.  World GDP growth is projected to slow to 3.0% in 2009 from 3.9% in 2008. A gradual recovery is projected for late 2009 but is more likely to take place in 2010.

Luckily New Zealand hasn’t been as influenced as the US or Europe. Still consumers and producers struggled during the last year. Mortgage rates have been rising and the housing market was sent into a quick slowdown. Drought had also a more significant effect on dairy producers than in the previous season and rising fuel and food prices affected all consumers.

Due to the housing situation more and more properties are rented out, as sellers don’t want to sell their places for such reduced prices which show a fundamental increase in rental housing supply. Due to the weakening labour market and those high food and petrol prices potential home buyers are much more cautious on what prices they are willing to pay. Therefore house prices dropped around 6% compared to prices last year and are expected to reach a drop of 10 % till the end of 2008. Residential construction also slowed down, however it will pick up again during the next 2 years due to growth of population.

Employment growth stalled over the first half of 2008. Real estate and retail sectors have been hardest hit, starting to shed jobs. Also hiring intentions are falling and difficulties in finding skilled labour have eased considerably while unskilled labour is now easier to find.  The return to a more balanced position between demand and supply will moderate the considerable pressure on wage inflation and labour costs. Overall further declines in employment are expected over the next 12 months with housing and retail being affected most. Annual inflation rose to 5.1% by September and bad weather in August increased vegetable prices. Despite this slowdown most pricing in retail areas remained relatively stable and construction costs even continued to grow.

The Department of Labour also released information that the labour force participation in Wellington was 69.6% compared to a 70.6% last year. Unemployment fell to 3.5% in June 2008.Furthermore the labour market is predicted to remain taut in the short term, with steady employment and continuous low unemployment albeit a marginal increase in unemployment of up to 0.5% is projected by market analysts. 

Obviously all these factors do affect New Zealand; however there are some buffers that help to reduce the impact. Mortgage rates are already declining. And food and fuel prices are also getting less. The RBNZ is expected to cut more basis points throughout this year to stabilize the cash rate and the tax cuts and low exchange rate will also help to compensate for weaker global growth. Export prices have climbed 19% over the past year due to higher international prices for meat and dairy products.

Recovery is on its way but it is predicted to happen slowly over late 2009 and 2010. The lower exchange rate will also increase NZ’s attractiveness as a holiday destination and will encourage visitors to spend more.  However the situation will take time to get back to normal and now is an important time to manage your cash flows and business relationships effectively.

For more information please check out the reports of ASB  https://www.asb.co.nz/section177.aspx?
Or browse through the Department of Labour website http://www.dol.govt.nz/publications/lmr/index.asp