Bernard Hickey 's Opinion

Bernard is an economics columnist for the NZ Herald

Bernard Hickey: 'Dutch disease' drives rash of losses Downunder

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Fonterra chief executive Theo Spierings. Photo / Sarah Ivey
Fonterra chief executive Theo Spierings. Photo / Sarah Ivey

The festering symptoms of "Dutch disease" have burst into a rash of losses across the Australian and New Zealand economies this week.

The Economist coined the term in the 1970s after Holland discovered natural gas in the North Sea. Gas revenues pushed up the Dutch guilder, hurting its manufacturing sector. Now Australia and New Zealand are experiencing the disease, thanks to demand from China.

Australia's iron ore boom over the past five years drove up its dollar by a third; New Zealand's free-trade agreement with China in 2008 unleashed huge demand for milk powder, which also pushed up the NZ dollar by about one-third.

This week, events on both sides of the Tasman crystallised just how much Dutch disease has changed our economies. Dutch disease is likely to end decades of V8 rivalry between Holden and Ford. This week Holden announced it was ending manufacturing in Australia because the high dollar and high wages made it more viable to build Commodores in China.

Ford announced in May it was leaving Australia.

That means the loss of about 200,000 Australian jobs.

The softness in Australia's job market is rebounding here, too, as net inwards migration climbs. Fewer Kiwis are leaving for jobs as mining slows, and plenty of New Zealand-born Aussies are coming home, too.

Another effect of Dutch disease was revealed this week by Fonterra when it forecast a halving of its profit and a 22c cut in its dividend. It also froze its forecast milk payout at $8.30/kg, which seems counter-intuitive given Chinese demand for milk powder is exploding. Fonterra normally sets the milk price it pays to farmers based on global milk-powder prices. They have run far ahead of cheese and butter prices, which means Fonterra must "over-pay" for the 30 per cent of milk it processes into the lower-priced cheese and butter. This has slashed $800 million from Fonterra's profit.

The last effect of the disease was revealed this week when the Reserve Bank included a scenario in its monetary policy statement that would see New Zealand's terms of trade (which measures the "power" of our exports to buy a certain amount of imports) fixed at its current 40-year highs.

The bank estimated it would have to hike interest rates even more to keep inflation under control. This would see mortgage rates rise to 8.5 per cent within years, rather than the 8 per cent currently indicated.

- Herald on Sunday

Bernard Hickey

Bernard is an economics columnist for the NZ Herald

Bernard Hickey is the publisher of Hive News, a Wellington-based political and economic subscription news email service. He also writes for Interest.co.nz and appears regularly on Radio New Zealand, Radio Live, TVNZ and TV3. He has been a financial journalist for 25 years, having worked for Reuters, the Financial Times Group and Fairfax Media.

Read more by Bernard Hickey

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