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Why New Zealand can handle Europe, oil troubles

New Zealand’s exports may face headwinds from the decline in oil price and strengthening of its currency against the euro, but the country’s prime minister told CNBC that the “Kiwi economy” is set to carry on booming.

The New Zealand dollar has appreciated just over 8 percent against the euro since in the last three months as expectations have risen that the European Central Bank (ECB) will announce a full-blown quantitative easing program when it meets this Thursday.

The kiwi dollar, as it is known, strengthened further to a record high against the euro on Friday after the Swiss National Bank made a surprise policy move to abandon its minimum exchange rate against the euro.

New Zealand Prime Minister John Key told CNBC that a stronger currency would not hinder the economy, one that is currently outperforming many developed nations.

“Obviously it’s had an impact as it’s pushed up the kiwi-euro rate and that makes it a little bit more difficult for our exporters but overall our economy is still very strong. We think we’ll grow 3.25 percent every year for the next three years, so about ten percent over the next three years so we’re still confident we can get there, even with a higher exchange rate.”

In December, Statistics New Zealand said the economy was growing faster than expected and had accelerated in the third quarter. Gross domestic product increased 1 percent in the third quarter from the previous quarter, according to the statistics body.

Key said that the New Zealand economy was being helped by economic activity in the U.S. and he brushed aside concerns over a slowdown in growth in Asia. Europe was another matter, however.

“The U.S. is much stronger than people think now, we see a lot of activity out of the U.S. both in terms of tourists coming and the buying activity. Asia is still quite strident and there is some concern that China is going to fall over but I don’t think that’s going to happen. It’s still Europe that’s got to deal with its fundamental issues.”

New Zealand’s third-quarter growth was driven by its primary industries, including the dairy industry and oil and gas exploration and extraction, which grew by 5.8 percent.

After dairy, meat and wood, oil is the fourth-largest export for New Zealand and, as such, the steep decline in global oil prices – down some 60 percent since June 2014 – could hit the country’s economy.

Indeed, exploration companies like New Zealand Oil and Gas, TEG Oil and Key Petroleum are all looking to defer projects in the region. Similarly, milk prices in New Zealand are also under pressure and prices forecasts have been revised lower for 2015 .

Key remained confident, however, that New Zealand could withstand the decline in commodity prices. “The fall in dairy prices is significant in New Zealand terms because it’s our largest export but we’ve had very strong commodity prices elsewhere, meat prices are strong and forestry prices are strong and we’re still pretty confident that dairy prices will recover.”

Key didn’t think that the oil prices would recover dramatically but the price decline could boost consumer sentiment.

“I don’t think oil prices will recover dramatically but the interesting thing about it is looking at the stimulatory effect of that drop in oil prices and so the impact on consumers is actually quite positive, it’s a tax cut or wage increase.”

– By CNBC’s Holly Ellyatt, follow her on Twitter @HollyEllyatt. Follow us on Twitter: @CNBCWorld

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