Slowing Chinese growth likely to weigh on prices

Slowing Chinese growth is likely to put pressure on New Zealand commodity prices this year, ABS senior rural economist Nathan Penny says.

This year's more modest outlook followed relatively positive prices throughout last year. The average level of prices last year was comfortably above the 10-year average in both USD and NZD terms.

In ASB's latest Commodities Weekly report, Penny said economic growth in China was slowing and that was expected to lead to more modest demand for New Zealand commodities.

China accounted for about one-fifth of New Zealand's overall goods exports and larger amounts for the log, dairy and sheepmeat sectors.

Agricultural production in New Zealand was also booming and the extra supply was also weighing on commodity prices.

The weather in spring was surprisingly good and it had continued in that vein so far this summer.

As a result, production was likely to remain firm over the coming months. Record-high dairy production was expected this season.

The global economy was also slowing, which was likely to lead to a broader slowing in demand for New Zealand export commodities.

In the United States, the trade tensions with China, combined with rising interest rates, were causing financial market volatility, while ongoing Brexit concerns were weighing on the United Kingdom and European economies.

However, there were positive offsets in play and the bank maintained a "glass half full" view for overall New Zealand commodity prices this year, just ''not as rosy'' as what was seen over 2018, Penny said.

The New Zealand dollar was at a supportive level and likely to mostly stay that way over the year.

As a result, commodity prices in NZD terms, if not USD terms, were still likely to remain above long-term averages.

And while overall Chinese economic growth was slowing, the household sector was expected to hold up better than the industrial and export sectors.

The ASB commodity price index started this year on a positive, albeit modest, note, lifting 0.3% and 0.5% in NZ dollar and US dollar terms over the week.

Dairy prices led the gains. In particular, milk fat and skim milk powder prices were strong and butter prices jumped 3.6% in USD terms over the week. In contrast, meat prices started the year soft and lamb prices posted a 2.9% fall.