We all know from experience that it can be hard growing up with an over achieving older sibling. Often it is hard to live up to what they have achieved and higher expectations are often shifted on to the younger sibling to achieve a similar level. In economic terms New Zealand is the younger sibling of Australia. For years we have underachieved relative to the Australian economy with its massive mineral wealth and perception as the lucky land. The New Zealand schools and universities are proved training grounds for capable people to leave the country and go and find fame and fortune in the bright sunshine of Australia.
When the GFC hit a few years ago, New Zealand businesses were quick to adapt and generally rode out the recession much better than previous ones. Banks acted sooner and we have seen overall less receiverships and liquidations of high profile businesses than we perhaps all expected, although the finance companies and unit trusts certainly made up for some of that in part.
Now that Australia is no longer the lucky land, it is facing economic downturn and uncertain times. The sad reality however is that while the older sibling is struggling, this is going to have some major economic consequences for its younger sibling being New Zealand.
We have already seen several cases where existing profitable New Zealand operations are having costs cut simply because the Australian parent or head office needs to get its affairs in order. It is often easier to trim the limb off than it is to prune the tree and as such costs are often cut in New Zealand notwithstanding that the New Zealand business operation is healthy and profitable, and has already gone through cost cutting several years ago. It is far easier for Australian bosses to get rid of people they don’t really know in New Zealand than the guy or girl sitting down the hall.
In our opinion there is going to be a significant flow on effect into the New Zealand economy from the downturn in Australia. There are some positives in this in that at least some of our brighter talent may no longer pack their bags and leave school and university to go and work in Australia. However, our export markets will reduce and as noted where our New Zealand businesses are branches of subsidiaries of Australian entities, cost cutting is likely to be the measure for New Zealand again as Australia needs to go through it to get its books in order.
While Asia may be the great white hope for our future of exports, particularly for companies like Fonterra and those in the primary sector, Australia does show that you cannot rely on one country or even one region for your economic prosperity and independence. New Zealand needs to be careful and make sure that we don’t put all our money on a single bet and that as an economy we choose to diversify as much as we can. New Zealand produces mainly only primary sector exports of any great significance these days, with its only other economic benefit being tourism. How New Zealand businesses strategize internationally is going to become increasingly important over the next few years.
Finally, the Reserve Bank has indicated that at some stage in the not too distant future interest rates will indeed go up. The New Zealand Herald even ran a front page article a few weekends ago noting that interests rates were picked to get as high as 7% or even 8% again in the foreseeable future. With many New Zealanders having borrowed large sums of money at cheap interest rates, the economic reality is going to hit home hard in the not too distant future if those rates increases do occur. It is important for those who borrowed money, especially those who borrowed funds at floating interest rates, to watch the yield girth and the outlook from the Reserve Bank. At some stage in the next six months those that are floating need to seriously look at locking long term fixed interest rates while they are available at relatively low levels. Often a strategy of spreading a single borrowing over multiple terms and fixed interest rate periods is good because when each part then comes up in the future, you are not dealing with the whole of the loan and in relation to where the interest rate cycle is at.
The final piece to this puzzle is the housing market. In the past inflation has taken care of effectively borrowing costs by diluting the debt percentages as time goes by, even if principle is not repaid. If the rate of inflation in housing prices decreases then the economic benefits of borrowing large are not necessarily going to be there. People certainly need to be careful when considering the levels of their debt and the affordability of current interest rates when making economic decisions. As always, we are happy to sit down and discuss these matters with clients to ensure that they understand the risks that they take when they borrow significant amounts of funds. Appropriate structuring is also important to ensure that interest is tax deductible to the greatest extent possible.
2013 may be half gone, but the second half of it is probably going to be the more interesting half of the year. Talk to you all soon.