Weak Chinese Growth And Low Energy Prices Hamper New Zealand's Economy

Includes: ENZL
by: FX Analyst

New Zealand's economy was badly affected by the milk poison scare in March but saved by a one-time tourist spike due to a major sports event and festive season.

Over the long term, weak Chinese growth and low energy prices will weigh on the New Zealand economy. RBNZ had to cut rates to 3.25% to salvage the economy.

Prolonged weakness is expected in the New Zealand economy and its stock market should be avoided.

The results for the first-quarter growth of the New Zealand economy are officially out. New Zealand grew by 0.2% in Q1 2015 compared to the previous quarter and is sharply below expectations of a 0.6% growth. This is also the sharpest fall in GDP growth in 10 quarters as seen in the chart below.

The New Zealand economy is tiny at US$183 billion compared to the US$16,768 billion for the US economy. Its economy was supposedly boosted by the hosting of the ICC Cricket World Cup and the Chinese New Year festival season in March 2015 as both are key draws for tourists.

Q1 2015 GDP Weakness

However, its economy was punctured by threats of milk poisoning by a disgruntled eco-activist as seen in this Financial Times article in March. This resulted in widespread global alarm, especially in China, which is the major importer of milk powder from New Zealand. New Zealand holds the record for being the largest milk producer in the world. As a result, Statistics New Zealand found that agricultural production dropped by 2.3% and this is mainly attributed to lower milk production.

The other drag on the GDP was the lower mining production as China cut back on commodities demand, not only from Australia but also from New Zealand. Mining activity witnessed a massive drop of 7.8% in the first quarter. New Zealand was also adversely impacted by the plunge in oil prices which reduced oil and gas exploration activities.

While the primary sector was a major drag on New Zealand's economy, its goods producing and services industry made up for the slack and prevented New Zealand from shrinking. As mentioned earlier, the New Zealand economy received a boost from sport fans who attended the Cricket World Cup and also Chinese tourists who took advantage of the Chinese New Year holiday to visit New Zealand. As a result, retail and accommodation grew by 2.4%.

In addition, its business services such as engineering and scientific activities were up 2.4%, while international air transport boosted its transport sector by 2.5%. As you can see from the chart below, the services sector form the majority of New Zealand's net worth in terms of Gross Domestic Product.

Source: Statistics New Zealand

The New Zealand economy was also boosted by an increase in consumption, net export and inventories, but fixed investments went down. Overall, while the services sector managed to pull New Zealand out of a contraction, it may not be able to do so in the rest of the year as the tourist attractions were a one-time event.

RBNZ Cuts Rates On Weak Growth Outlook

With GDP growth much weaker than expected, New Zealand's central bank had to cut its interest rates by 0.25% to 3.25% on 11 June 2015 to bolster growth. The Reserve Bank of New Zealand (RBNZ) expects GDP growth to decline for the rest of the year given the headwinds of weak Chinese growth and the decline in commodity prices.

Source: RBNZ

New Zealand is a small yet open economy and is very much affected by global economic conditions. The RBNZ does not expect the Chinese economy and oil prices to recover fast enough to reverse its falling GDP growth rate. The Q1 2015 growth of just 0.2% was a shocker to them and indicated that full-year growth might even fall below 2%. In addition, the New Zealand economy is vulnerable to mischief by disgruntled individuals and less resilient as compared to major economies like the United States.

Further ENZL Weakness Expected

The stock market reacted clearly and rapidly after the March milk scare as seen in the iShares MSCI New Zealand Capped ETF (NASDAQ:ENZL). The ENZL tracks the broad performance of major New Zealand companies on the MSCI New Zealand IMI 25/50 Index which essentially covers the entire New Zealand market.

The milk poison case was the start of New Zealand's economic weakness and the market started to sell its equity. The oil price recovery which started in January 2015 turned out to be slower than expected and the drag on the New Zealand economy was only evident later.

As tourist arrivals decline, the earnings of New Zealand companies will fall and there are not much drivers of growth for New Zealand until the global economy recovers. There is a limit as to the increased consumption on growth. Hence, it is best to stay away from the New Zealand stock market for now as further weakness in the ENZL is expected.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.