Dealing with uncertainty
What does the rest of 2015 have in store for exporters? John Walley consults the crystal ball.
The attractive parts of being an exporter, such as greater scale and more opportunities, also come with greater exposure to external risks: exchange rate variations, changing demand from economic cycles in destination markets and even tensions in geopolitics all impact any export business. Managing risk becomes a key skill for exporters.
Such fluctuations can go either way; sometimes providing new opportunities, higher demand or greater margins – other times the opposite, putting firms under pressure.
Unfortunately, many of the events are hard to predict and the consequences of any given event depend as much on the prevailing conditions as the event itself. At this point a year ago who would have predicted oil close to $50.00 a barrel, a dairy pay-out potentially below $4.50 or even the Swiss National Bank breaking their Euro peg as the European Central Bank moves to massive Quantitive Easing?
Over the last half of 2014 uncertainty pretty well increased everywhere, meaning volatility will be a bigger factor looking forward than this time a year ago. Exactly how this will play out for exporters in 2015 depends on individual circumstances – volatile times bring risks and opportunities for those who continue to adapt and innovate.
Towards the end of 2014 our own survey reported improving sentiment within the manufacturing and exporting sectors, with many reporting better conditions and more positive future expectations. After an extended period of a very overvalued currency, particularly against the US$, the fall-back late 2014 helped exporters.
Since then it has remained volatile and we have the weaker AU$ to deal with. Our survey showed strong export sales growth in the first half of 2014, then slowing and reaching negative territory in the last two months of 2014.
Looking to 2015, domestic activity remains reasonably robust for most, with the Christchurch rebuild still holding up activity in the building supply sector. However, economic risks remain, particularly in the housing market and dairy sector. The lower dairy payout along with lower volumes and potential drought is estimated to cut $6 billion off GDP, and those manufacturers and engineers supplying the dairy industry may struggle as lower rural cashflows slow investment and spending.
In international markets, the US is the main bright spot of growth; parts of their economy are bouncing back. We can hope that lasts and it is encouraging for exporters who have hung onto US business, now looking forward to growth and a decent return from US$ sales.
While the US cross [rate] has improved there is still the prospect of more. The RBNZ said in a recent speech that the exchange rate remains at exceptional levels compared with history – listing the TWI, Yen, Euro and AU$ as examples, and continuing to say it is “unjustified and unsustainable”. Most are expecting the currency to fall, but the extent and timing of this is hard to judge, and relies on global markets bouncing back as well as the decisions of the world’s big central banks.
The RBNZ held the OCR at 3.5 percent in February, but did change their language to open up the possibility of cutting in future. Recent inflation numbers came in low at 0.8 percent for the year ended December; however house price inflation remains high and a risk going forward that will need to be addressed.
I think the RBNZ will move on macroprudential regulation of asset markets and may look to cut the OCR in the first half of this year and potentially
a second cut before the end of the year. I’ve been of the view that the last two 0.25 percent OCR increases in June and July would not have happened had they been delayed to September. These should be reversed and the RBNZ could do more than just talk about an overvalued currency.
The Euro-zone continues to have issues and the European Central Bank have announced a 60 billion Euro a month stimulus programme to boost the economy out of stagnation. This will hurt exporters selling into Europe, as the NZ$ is likely to appreciate significantly against the Euro, but could have benefits if it succeeds in kick-starting growth.
Two of our major export markets, Australia and China, have both had weaker growth outlooks of late, with China’s reduced demand for iron ore and other minerals hitting the Australian economy. China’s lower demand for dairy was also one of the driving factors behind a plunge in dairy prices – however this is temporary due to over stocking, and demand is expected to bounce back beyond the second quarter of 2015.
Greater uncertainty brings risks and opportunities: focusing on building brands, staff capability, sales and supply channels and getting closer to customers to support and improve innovation helps leverage opportunities.
As for dealing with risks, deleveraging and general attention to balance sheet strength is always prudent.