Karen Silk, Westpac General Manager, corporate and institutional.
As an exporting nation the performance of our economy is highly dependent on those of our trading partners as well as outcomes of geopolitical change such as that currently in play in Europe. Both will heavily influence competing supply, demand and subsequent price for the goods we export.
The ascent of China to the number one destination for New Zealand merchandise exports can be attributed to growing demand by Chinese consumers for high quality protein goods, in turn reflecting rising consumer incomes and increasing confidence. Likewise, the more recent declines in the value and volume of NZ soft commodity exports were heavily influenced by a decline Chinese consumer confidence.
With scale of unprecedented proportions, variation in Chinese consumer appetite has the ability to create volatility in revenue and return for NZ business not previously seen and therefore an understanding of the mood of the Chinese Consumer is critical. Until recently there has been precious little information available as a predictor of Chinese Consumer behaviour.
The Westpac Economics team has addressed this informational shortfall by teaming up with MNI Indicators to produce the Westpac MNI China Consumer Sentiment Index. Each month we telephone 1000 ordinary Chinese people across 30 cities and enquire about their financial situation and prospects.
The survey dates back to 2007 and has afforded us fantastic insights some of which we share below.
Chinese consumer sentiment plunged in early 2014, and by October was close to the lowest levels seen in the history of the survey. That drop in Chinese consumer sentiment was an important leading indicator of waning Australasian export prospects.
New Zealand found that fewer Chinese consumers were willing to stretch to high-end food products imported from distant lands. Nowhere was this more evident than in last year's plunging prices for dairy exports.
But other exporters are now beginning to feel the pain. Notably, Chinese demand for mutton is diminishing. Australia was even more profoundly affected. The slowing Chinese construction sector reduced demand for steel, which has flowed through to lower prices for Australia's key exports, iron ore and coal.
New Zealand has felt the knock-on effect of that Australian slowdown via the super-strong New Zealand dollar / Australian dollar exchange rate, which will tax the tourism sector among others.
We've also seen a surge on homeward bound Kiwis fleeing the weak Australian economy.
After such a long period of pessimism, we welcomed the green shoots of recovery that were evident in the March instalment of the Westpac MNI China Consumer Sentiment Index. Chinese consumer confidence has clearly been boosted by the central bank's decision to lower interest rates in late February.
Chinese consumers have now responded in positive fashion to both of the interest rate cuts delivered so far in the current cycle. That underlines the fact that monetary policy settings were overly restrictive in 2014, and that the progressive unwinding of those settings will benefit the economy, to a degree, this year and next.
While the Chinese economy's many structural challenges are a genuine constraint on the long run sustainable rate of growth, the survey argues very strongly that policy remains a potent force in the minds of consumers.
Notably, easier policy settings, with the promise of more to come, seem to have out-weighed the lowering of the annual growth target in the minds of consumers.
Looking at the results in more detail, the major impulse in the month of March was a steep uplift in both current and expected family finances. Current and forward-looking assessments of business conditions also increased, but less dramatically so.
Following the pronounced pessimism that dominated much of 2014, this tilt towards a more optimistic posture is exceedingly welcome. It is too early, however, for China's policymakers to declare victory.
The consumers' attitude towards real estate was also more positive, on balance, building on the modest cumulative improvement since November last year.
Following the pronounced pessimism that dominated much of 2014, this tilt towards a more optimistic posture is exceedingly welcome. It is too early, however, for China's policymakers to declare victory. Over the full history of the survey, it has sent decisive signals around cyclical turning points that with hindsight count as definitive. To our minds, the jury is still out (and is probably ordering dinner).
Even so, the survey is clearly indicating that the worst is passed. In other words, further deterioration from already straightened levels is now unlikely. In sum, the trough for confidence in this current cycle has already been described: it is not a prospective event.
Well-versed China watchers will know that consumer confidence and the state of the housing market are difficult to separate. In this regard, Chinese consumers are little different to their Kiwi, Australian, British or Korean counterparts (to name a few). Ergo, the Westpac MNI survey captures a wide range of attitudes to the housing market.
The key to last year's drop in Chinese consumer confidence was falling house prices.
Our reading of the current housing situation, based on the latest Westpac MNI survey with due deference paid to the official data on prices, construction and turnover, is that the overall market troughed in October of last year. However, the improvement since that time has been a) timid in scale, b) geographically uneven, and c) dramatically different from previous recovery phases that have been characterised by rapid rebounds in activity fuelled by very strong policy multipliers.
Our forecast is that housing construction activity will dig its way out of negative annual growth territory by the September quarter of this year, and grow modestly thereafter. This will help to stabilise the demand side of the Chinese economy, with flow-on benefits for New Zealand. We remain comfortable with our forecast for gradually rising dairy export prices and modestly improving conditions for other exporters to China.
The intimate linkages between consumers and the housing market highlights that a more confident Chinese household sector is a necessary condition for a recovery in the near-term fortunes of New Zealand's soft commodity industries. In the longer term, the Chinese household sector will be the major driver of New Zealand's services exports, with inward tourism and higher education topping the list.
Further, Chinese households will become a major foreign investor in our financial markets, as the inevitable deregulation of cross border capital flows progressively gives this group greater freedom to diversify their portfolios.
Building a deep understanding of the collective psyche of this group of consumers is thus a basic requirement for developing a considered view of New Zealand's own short and long term economic prospects.
• The Westpac MNI China Consumer Sentiment survey is released on a monthly basis.
• Dominick Stephens is chief economist (NZ) and Huw McKay is senior international economist (Sydney) for Westpac.
House prices will be 20% lower in real terms by the mid-2030s than in 2021.