- In general, the performance of a stock market reflects the underlying health of an economy. Ideally, when an economy enters a recession phase, the stock market would echo the sentiment and fall.
- While several countries are struggling with the rising coronavirus cases and unable to curb the spread, New Zealand has successfully managed the pandemic.
- The island nation has focussed on maintaining and building trade relations with other geographies; formally launched free trade negotiations with the UK on 17 July 2020.
- MFAT has taken steps towards the trade recovery strategy, recover from the COVID-19 impact and grab new opportunities for export and investments.
- NZAC showed an ongoing recovery in June despite the marginal drop in the activity below 2019 levels.
The stock market has a direct financial impact on the economy as well as the individuals. If we look at history, we have seen that the stock prices and prices of other financial assets are an essential aspect of economic activities. The market indicates the social mood and reflects the economic activity and financial stability of a country.
Several economic factors have a direct influence on the stock market. Below are some of them:
- Interest rates
- Government stability and policies
- Inflation and recession
- Gross Domestic Product
- Unemployment rate
- Trade Wars
- Natural Disasters and many more.
In this article, we would be looking at New Zealand’s economy and three factors that might influence the decision of market participants.
New Zealand successful in tackling the COVID-19 crisis:
While most countries are struggling to come out of the COVID-19 catastrophe, New Zealand was the first country around the world which declared itself free from this deadly disease during the second week of June 2020. While there have been a few cases reported since then as some individuals who returned from abroad were infected, as on 22 July 2020, (at 9:00 AM NZST) there were no new active COVID-19 cases in the country.
No one knows for sure about the duration this pandemic will last. However, this virus would leave a long-lasting impact on the world’s economy. When these economies are compared with the New Zealand economy, the island nation is in a better position.
In a recent report released by the New Zealand government, the government has come up with a “Stamp it Out” plan for responding to new cases of COVID-19 in the community. The plan includes the elimination of COVID-19 to keep its citizen safe and simultaneously support the economic recovery.
Possible Scenarios pointed by the government of the rising new COVID-19 cases:
- Contained cluster within a community - Example: Aged residential care facility.
- A large group within a region - Example: Café.
- Multiple clusters spread nationally - Example: large sporting events and concerts.
The government has framed four approaches to lessen the chances of COVID-19. These would be:
- Border controls
- Surveillance and testing
- Contact Tracing
- Hygiene Measures.
NZ’s multilateral economic and trade developments:
New Zealand, in the present time, is actively engaged in discussions related to the impact of COVID-19 on food security and supply chains along with the role of trade in economic recovery. The country strongly believes in keeping trade flows and upholding the rules-based trading system.
On 17 July 2020, New Zealand and the UK formally launched free trade negotiations. The UK was NZ’s sixth-largest trading partner in 2019, with two-way trade of ~NZ$6 billion. The first round of negotiations would take place via video conferencing.
The Ministry of Foreign Affairs and Trade (MFAT) has also taken a step towards the trade recovery strategy which would help the country to position itself well and recover from the impact of the COVID-19 and grab new opportunities for export and investment.
The government also highlighted that ~25% jobs depend on exports. In present times, exporting firms are more productive, and they hire more people and provide them with a better wage. Hence, a more robust tradable sector would help the country to recover.
At the time when the country was at the peak of COVID-19 cases, the focus was on protecting trade flows and supply chains to ensure that the citizen has access to essential items like medicines and PPE and simultaneously, the goods produced within the country reaches the trading partners.
The next phase of the country’s response is to recalibrate the trade policy for a new global environment. On this front, the government has three strategic pillars. These are:
- Retooling support for exporters.
- Strengthening global trade architecture.
- Refreshing crucial trade relationships.
Economic Update: Business activity continues its recovery, business confidence improves
As per the recent update by the New Zealand government for the week ended 17 July 2020, the New Zealand Activity Index (NZAC) showed an ongoing recovery in June despite the marginal drop in the activity below 2019 levels. The housing market rebounded, and electronic card spending climbed beyond 2019 levels.
In the preliminary survey in July 2020, the business confidence was seen improving. In a recent Reserve Bank survey, it was found that the demand for the credit has fallen as businesses review investment decisions.
International arrivals dropped significantly and reached its 60-year low in May 2020. Thus, bringing the projected net migration near to zero.
The consumer price index during the June 2020 quarter slipped 0.5% after the rise of 0.8% in March 2020. Hence, the annual inflation rate slowed to 1.5%. The fall in the CPI was driven by the lower petrol and accommodation prices.
In June, the housing prices improved by 1% to be up 8.6% from a year before. The sales volumes are currently back to that level which existed before the pandemic. Pent-up demand, lower inventory levels, improving monetary conditions, and elimination of LVR restrictions have aided the housing market recover.
The government also reported that spending in 5 out of 8 industries increased in June 2020.
- Electronic card spending improved 4.2% in June 2020 as compared to the previous corresponding period.
- Spending for durable grew up by 24.2%.
- Consumable spending increased by 10.5%.
- Other factors influencing the increase in the expenses were pent-up demand from lockdown, changing consumer behaviour towards electronic transaction instead of cash.
A Glance at the quarterly and monthly indicators of the economy:
As on 22 July 2020, NZ$1 is equivalent to US$0.66.
The stock market always takes cues from a relative standpoint, given the current economic situations across the world, New Zealand is hands down in a better footing. The future outcome would definitely depend on how well the country can leverage on the head start that it has witnessed in tackling the COVID-19 pandemic, and the stock market participants are closely watching every move the government and its people are making.