Brian Gaynor 's Opinion

Investment columnist for the NZ Herald

Brian Gaynor: NZ fails to make most of agriculture boom

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Emerging economies are racing ahead when it comes to growth while developed nations are stumbling along. Photo / AP
Emerging economies are racing ahead when it comes to growth while developed nations are stumbling along. Photo / AP

The latest International Monetary Fund World Economic Outlook, which was published this week, highlights the two-speed nature of the global economic recovery.

The developing economies, with China and India in the lead, are in full flight while the developed countries, mainly the United States, the euro area countries and Japan, are growing at a more modest pace.

The IMF believes that the developing world will continue to power ahead while the developed world will struggle because of large government deficits, depressed housing markets and high unemployment.

The global financial crisis is over, according to the IMF, as shown by the historic figures and forecasts in the accompanying table.

Total world output contracted by 0.5 per cent in 2009, the nadir of the global economic recession, but was a positive 5 per cent last year.

The developed countries performed especially poorly in 2009 with only three of the 34 countries in this group achieving positive GDP growth. These were Australia with 1.3 per cent growth, Israel 0.8 per cent and Korea 0.2 per cent.

Most of the major emerging countries achieved positive growth in 2009 with the notable exception of Malaysia and Thailand. However, they both rebounded strongly last year with Malaysia growing by 7.2 per cent and Thailand 7.8 per cent.

The IMF is more optimistic about the 2011 year, compared with its last World Economic Outlook published in October.

The Washington-based organisation has raised its world 2011 output forecast from 4.2 per cent to 4.4 per cent, mainly because the US has been upgraded from 2.2 per cent to 2.8 per cent and the euro area from 1.5 per cent to 1.6 per cent.

Growth forecasts for China and India have been marginally reduced but they are still expected to achieve GDP growth of 9.6 per cent and 8.2 per cent respectively this year.

New Zealand has had one of the biggest downgrades since October with 2011 growth now expected to be 0.9 per cent compared with 3 per cent in the previous outlook.

This is mainly because of the expected impact of the second Christchurch earthquake, but GDP growth is forecast to rebound to 4.1 per cent next year as the rebuild of the southern city gets into full swing.

The IMF is optimistic on the outlook for emerging countries. These countries have been left with no lasting wounds from the global financial crisis, are now in a strong financial position and are benefiting from low interest rates. Exports have largely recovered or are being replaced by higher domestic demand where exports haven't picked up.

Although most of the major developing countries have grown spectacularly in recent years, they still have a long way to go before they catch up with the rest of the world on a per capita basis.

For example, Australia is ranked seventh in the world with a GDP per capita of US$55,600 and New Zealand is 24th on US$32,100.

China is in 94th place with GDP per capita of US$4400 and India is 138th on just US$1260.

Economic upsurge in China, India and other developing countries is one of the most significant developments since the Industrial Revolution. Many economists believe this still has a long way to run and the Chinese economy, second to the United States in total size, will be the world's largest economy within the next two decades.

China would be the world's largest economy if it could raise its GDP per capita from US$4400 to just US$12,000, which compares with the United States' US$47,300 at present.

This is because China has 4.4 times the population of the US.

There's clear evidence that Australia has taken advantage of the emerging countries' boom whereas we haven't.

One of our excuses is that Australia has huge advantages over us because of its huge mining resources. On closer examination this is not true.

The world has had a huge commodity boom over the past decade or so, particularly over the past 12 months. The boom has been in both hard and soft commodities with the latter outperforming the former for large portions of the decade.

Hard commodities are extracted or mined whereas soft commodities are grown and include all agriculture products and timber.

Australia has taken advantage of the hard commodities boom, whereas we haven't seized the full benefits of the sharp rise in the demand and price of soft commodities for a number of reasons. These include our overemphasis on investing in land for capital appreciation, lack of investment and the running down of our forestry industry under foreign and Graeme Hart ownership.

By contrast, most of the world's other major soft commodity exporters, particularly Argentina and Uruguay, have taken full advantage of the soft commodity boom.

Argentina's GDP has grown by more than 8 per cent in six of the past eight years and it had positive growth in 2009, while Uruguay's economy has grown by an average of 5.6 per cent a year over the same eight-year period.

New Zealand's economic growth has averaged just 1.9 per cent in the eight years to last December.

The IMF has identified commodity price inflation, particularly food prices, as one of the major threats to the emerging countries and the global economy.

This is because food represents a larger percentage of total consumption in emerging countries compared with developed nations. For example, the consumer price index basket, which is an attempt to measure inflation based on average household expenditure, has food representing 31.8 per cent of the Chinese CPI basket compared to 17.8 per cent in New Zealand.

The IMF is concerned that continuing food price inflation, together with rising oil prices, will create widespread inflation pressure in emerging countries and force the monetary authorities to put the brakes on their economies by raising interest rates.

The IMF is also concerned that financial investors and speculators are pushing up commodity prices by investing in exchange-traded products and commodity index swaps. It estimates there is approximately US$376 billion ($474 billion) of commodity assets under financial management.

A recent paper by the Bank of Japan (BoJ), "Recent Surge in Global Commodity Prices", also highlights this issue.

The BoJ argues that easy monetary conditions in developed countries have stimulated investment in commodity markets as investors look for higher returns.

And "financial investors, including institutional investors, who increased their exposure to commodity index investments viewed commodity futures markets as vehicles for enjoying the benefits of diversification and improved the risk-return profile of their portfolios".

Japan's Central Bank concludes: "As commodities become financialised under the loose monetary environment, global commodity markets are likely to overheat and to have destabilising effects on the global economy.

"Although global commodity prices have been increasing faster than the global CPI, as seen in the rise in the relative prices of commodities, global accommodative monetary conditions could stoke inflationary pressures, causing the global CPI to catch up and rise more rapidly," said the Central Bank.

"This interaction might lead to a vicious, self-fulfilling cycle in which growing inflationary pressure drives more financial investors towards commodity index investments for an inflation hedge, which further accelerates inflationary pressure."

The IMF and BoJ are positive on prospects for the world economy but they both warn that continuing commodity price rises, including New Zealand's export prices, are the biggest threat to the emerging economies which are the engine room of world growth.

Brian Gaynor is an executive director of Milford Asset Management.

- NZ Herald

Brian Gaynor

Investment columnist for the NZ Herald

Brian Gaynor has written a weekly investment column for the Weekend Herald since April 1997. He has a particular passion for the NZX and its regulation. He has experienced - and suffered through - the non-regulated period prior to the establishment of the Securities Commission in 1978 and the Commission’s weak stewardship until it was replaced by the FMA in 2011. He is also a Portfolio Manager at Milford Asset Management.

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