World economy on the turn – but NZ may not benefit much

The world economy appears to be on the turn, according to the Organisation of Economic Development (OECD).

The OECD’s composite leading indicator index, which is designed to pick up turning points in economic activity, is forecasting a stronger pick up in the world economy.

“The United States and Japan continue to drive the overall position but stronger, albeit tentative, signals are beginning to emerge within all other major OECD economies and the Euro area as a whole,” the report says.

After nearly four years of either recession or sub-par growth, along with recurring spasms of financial market demi-panics, the news is a positive sign for the world economy.

However the parts of the world economy that New Zealand is most involved with are not expected to see such a pick up, according to the organization’s survey of leading economic indicators.

Crucially, the near-term outlook for China is for below-trend growth, which will not only firms directly exporting to China but also those exporting to Australia, due to Australia’s high level of dependence on Chinese economic growth.

“The major concern in China is the signs of weakening domestic demand, which is manifest, for instance in private housing starts and fixed investments,” the report says.

Australia is New Zealand’s largest trading partner, taking 23% of exports in 2011. China took 12.5% of exports over the same period.

The mix of exports is different: Australia takes a comparatively high proportion of New Zealand manufactured exports, while exports to China are dominated by dairy and to a lesser extent wood products.

The OECD report came the same day as the New Zealand’s largest exporter, dairy giant Fonterra, announced a cutback in its payout forecast for the coming year, citing lower prices and a high New Zealand dollar.

Fonterra is responsible for 25% of New Zealand’s export earnings and in December exported its higher monthly volume of exports in the company’s history.

That run of high volumes is expected to continue, due to the unusually wet summer season, but the prices for those exports are now forecast to drop from $6.50/kg of milk solids to $6.35/kg.

That would shave about $200 million from farm incomes in the coming year, Goldman Sachs New Zealand economist Philip Borkin says, as well as about 0.1% off GDP growth – if production were the same as last season.

However the higher production this year may temper the impact of the price downgrade, he says.