What started as commodity deflation has turned into a full blown commodity crisis as a tidal wave of bad news impacts the outlook. Comments from China about an expected drop in raw material imports and a startling amount of devaluation feeding the current leg of the global currency war have contributed to the recent carnage in the energy complex and base metals. However, agricultural commodities have not proved immune and are largely driven by many of the same factors. New Zealand in particular has been one of the harder hit regions in the Asia-Pacific region due to its large exposure to the Chinese economy and slipping exports. While the Central Bank has maintained an accommodative stance to combat the downturn, more action will be needed to keep the economy afloat.
RBNZ Eases
In general, the New Zealand economy is fairly insulated from global economic developments owing to its particularly stable predisposition. The nation of 4.4 million is approximately the size of the United Kingdom and is known in particular for sheep outnumbering humans by a wide margin and exports of milk solids. However, commodity deflation has not left milk out of the equation. Crop yields across the globe are forecast to be stronger this year, contributing to a price drop in agricultural commodities. The price of milk solids in particular has fallen by over 40% versus the figures from the prior year. Since 2013, around the same time that gold prices started rapidly falling, milk solid prices have plummeted. Contributing to the downside was another case of oversupply with production outstripping demand by a wide margin.
A result of the drop in milk solid prices has been pressure on inflation measures which have also trailed lower. The most recent annualized inflation figure printed at 0.40% with quarterly consumer prices experiencing rapid disinflation with the latest figure at 0.40% while the prior two figures printed in deflationary territory. With inflation tumbling and commodity prices sharpening the dive down, the Reserve Bank of New Zealand has been forced to act on a number of occasions to accommodate the economy with increased monetary stimulus. So far, activities has solely included interest rate cuts in a bid to improve lending conditions and weaken the New Zealand dollar. In the last year, the Central Bank has slashed interest rates by 75 basis points to 2.75%. The New Zealand dollar has largely reflected these measures with a steep drop in the local currency.
