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arkadiusz-sieron

Is New Zealand Heading for Recession?

October 7, 2015, 8:59 AM Arkadiusz Sieroń , PhD

We move to the Antipodes, as the Reserve Bank of New Zealand lowered rates again at the September meeting. Is the recession possible in New Zealand? How could it affect the global economy and the gold market?

The New Zealand is a small open economy, heavily dependent on international trade (exports account for 24 percent of its output), particularly in agricultural products. Thanks to strong demand from China and high commodity prices, the Great Recession was relatively mild in New Zealand. Its economy was even described as a rock star economy in 2014 and the New Zealand dollar was the hottest currency that year. However, with the slowdown in China, the country’s second largest trading partner, and with economic problems in Australia (the country’s first largest trading partner), the situation is likely to change. Thus, it is not only about the direct impact, but also about the indirect, as New Zealand’s major trading partners all have China as their first of second major trading partner.

The China’s softer demand caused the decline in the price of dairy products and the Kiwi dollar exchange rate. This is why the outlook for the New Zealand economy deteriorated and the Reserve Bank of New Zealand lowered rates again at the September meeting (the Official Cash Rate was reduced by 25 basis points to 2.75 percent) following cuts in June and July this year. Another problem is the property bubble driven by excess indebtedness and high levels of household debt. The housing prices have doubled in the past decade and even the central bank noted recently: “house prices in Auckland continue to increase rapidly and are becoming more unsustainable”. Moreover, New Zealand’s banking system is exposed to the bubble in Australia.

The bottom line is that New Zealand is edging toward a recession, however, it still has a long way to go. Given that New Zealand is a small player on the worldwide economic stage (smaller than Greece), the consequences of its slowdown will not be great, neither for global economy, nor for the gold market. The importance of the New Zealand’s problems lies in reflecting the global turbulences after the slowdown in China, which could have more direct effects for the yellow metal.

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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor

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