How Small Is It?
New Zealand’s entire gross domestic product, the value of all goods and services produced within a year, was approximately $128.1 billion in 2007, around the same amount as the state of Iowa. The importation of one major piece of industrial machinery earlier this year required a comment in investment banks’ economic reports so as not to set the import-export seesaw tottering. Economic analysts regularly track “external migration” as workers flock to Australia, Canada and the United Kingdom for jobs, then flow back home when economic times pick up. When 29,000 jobs were lost in the first quarter of 2008, that was 1.3% of all the jobs in the nation, and it was enough to send the unemployment rate from 3.4% to 3.6%.
Services comprise the largest single sector of the economy and in 2006 made up 76% of employment. Agriculture, although only 7% of the total economic pie, heavily influences the rest, with industrial sectors including food processing such as milk and meat, wood and paper production from forestry and textiles from wool. It’s estimated that the recent drought’s effect on agriculture, and its attendant industrial sectors and hydroelectric production, was enough to knock a full percentage point from GDP growth in the first half of 2008.
Industrial production is kept discreet so that it doesn’t injure the other major industry—tourism—nor the burgeoning film sector. Crude oil, extracted offshore from the Tui oilfield, is loaded aboard tankers from the wellhead and immediately exported to overseas refineries rather than touching those pristine shores, while the government has funded an agency called Film New Zealand as a “one-stop shop” (their term) for producers of movies both major and minor to simplify the process from casting to special effects.
But much of this economy is based on trade, and exports influence fully 22% of New Zealand’s GDP, leaving the economy at the mercy of global whipsaws. Although soaring commodities prices, including milk, meat and crude oil, have bolstered trade-based cash flows for the past few years, imported refined gasoline costs have surged even higher, rising 12.8% in the first quarter alone and driving consumer inflation to income-crunching levels.
The Reserve Bank of New Zealand’s attempts to contain inflation have included raising the interbank (wholesale) interest rate to an eye-popping 8.25% and leaving it there for a solid year. However, this has made the New Zealand dollar a favorite for international investors dabbling in what’s called the carry trade, where funds are borrowed in a nation with a very low interest rate (such as Japan’s 0.5% or the 2.0% current in the United States) and invested in a nation with a high one. Although the investor risks currency fluctuations wiping out those gains, the practice has become so popular that New Zealand’s currency has been pushed to frantically high levels—making their goods more expensive overseas and reducing the volume and value of those all-important exports proportionally.
It doesn’t help that there’s a housing market “correction” underway there, too, matching those in the U.S. and UK although not as severe. With banks passing on those high interest charges to their clients, mortgage rates are variable and in double digits, sending home sales plunging by 42% since June 2007.
The official definition of a recession is two consecutive quarters of negative GDP growth. With first quarter 2008 GDP printing at −0.3% and the second quarter looking even worse, it’s likely that New Zealand will be the first industrialized nation in 2008 to meet this definition.
Economic analysts expect that the slowing growth will cool inflation and give the Reserve Bank a chance to lower those interest rates, leading to higher domestic growth over time and sending international investors elsewhere in their search of carry trade profits. As the New Zealand dollar weakens against other major currencies, their exports will become more affordable overseas and those discreet industries will become more competitive on the global marketplace.
Who knows, Peter Jackson’s next New Zealand movie, The Hobbit, scheduled to go into pre-production in 2009 and into shooting in 2010, may be enough to pull the entire nation out of the recession. And an end to the drought won’t hurt, either.