Weaker-than-expected prices in last week's GlobalDairyTrade auction could be an early sign that Chinese buyers are feeling their weaker purchasing power as the yuan devalues, says Mark Lister, head of wealth research at Craigs Investment Partners.
The main GDT index fell 2.5 per cent last week while the yuan fell to more than seven to the US dollar last week for the first time in 11 years and President Donald Trump's administration then accused China of being a currency manipulator.
The moves were the latest escalations in the trade war Trump started in April last year when he unveiled tariffs on some Chinese imports.
Since then, the yuan has fallen 11 per cent against the US dollar, hitting a low of 7.1397 last week.
"When you think about all these trade war issues, the big risk is that it escalates and creates an even bigger global slowdown than we've already seen," Lister says.
"The worst-case scenario is it pushes us into a global recession."
The fate of New Zealand's economy is closely interwoven with China, which is now our biggest trading partner with Australia now in second place.
"But Australia's even more exposed to China – that's probably the big show-stopper, if the wheels fall off the Chinese economy," Lister says.
The evidence out of China is mixed so far and, although it has tended to be more on the weaker side of the ledger, it reported stronger-than-expected trade data last week with its dollar-denominated exports rising 3.3 per cent in July from a year earlier.
However, that data also showed imports fell 5.6 per cent in July, although that was also better than expected.
"That might mean things aren't slowing down as much as people think but it could also mean buyers are stockpiling orders," Lister says.
Another negative indicator is that oil prices are weaker and commodity prices generally are also coming off the boil. "The Chinese are a big commodity purchaser of everything, including dairy," Lister says.
While the latest GDT result could be a harbinger of things to come, the main GDT index is still up 13.1 per cent year-to-date and is 2.5 per cent higher than a year ago, he says.
China will be releasing monthly activity indicators this week, including fixed-asset investment, industrial production and retail sales for the month of July.
"Markets will be watching for evidence of any impact from the escalating trade tensions with the US, although in this regard the next few months will probably tell us more," Lister says.
Should the global economy turn sour, the New Zealand dollar is likely to fall which will cushion the impact of falling global prices on dairy farmers.
During the GFC, for example, dairy prices fell about 65 per cent and the New Zealand dollar fell from about 80 US cents to below 50 cents.
"Historically, there's a strong relationship between dairy prices and the New Zealand dollar," Lister says. "The currency does provide an important shock-absorber for us."
Reserve Bank governor Adrian Orr made it clear that the uncertain and deteriorating global outlook, the actions of other central banks around the world which are also cutting interest rates, and the need to prevent the New Zealand dollar from becoming too strong were all factors in the decision to cut the official cash rate by 50 basis points to a record low 1 per cent last Wednesday.
That shocked financial markets which had been expecting a 25 basis point cut.
But with other countries wanting their currencies to fall, and notably Trump wanting a lower US dollar, "it's a zero-sum game. You can't all have a lower currency," Lister says.
While Orr would like to see the OCR cut stimulating business and consumer sentiment, business investment and consumer spending, it's possible the OCR cut could be counterproductive.
"It looks odd to all of us that we've just had a 50 basis point rate cut – no one thinks we're in the sort of territory that we need a 50 point cut in the OCR," Lister says.
Previously, when the RBNZ has cut the OCR by 50 points, it's been in reaction to such events as the Christchurch earthquakes, the GFC and the September 2001 terrorist attacks that brought down the World Trade Center in New York.
"They only cut by 50 basis points when it's in crisis-mode and we're a million miles from a crisis. We've got some challenges, but we're not in that territory."
Last week's cut "was a risky move and it could backfire," Lister says, adding that at a couple of his speaking events since the rate cut, that was the tenor of questions from the audience.
"What does the Reserve Bank know that we don't know? If they're panicking, should we be panicking," were the kinds of questions he got, he says.
"I don't think that's the message Adrian Orr wants business to take. The desired outcome for the Reserve Bank is that people start spending more money and business starts to invest more."