Mark Hoppe looks at the latest economic landscape in the US to outline the trade opportunities for New Zealand exporters. How much of a factor is all the market uncertainty?
The United States and New Zealand have had a bilateral trade and investment agreement in place since 1992. New Zealand counts the US as its second-most important trade partner after Australia, and the US is the second-most popular destination for New Zealand foreign investment, accounting for 15.4 percent of all investment in 2017. In that year, the US imported US$4.16 billion in goods from New Zealand.
Bilateral trade in services stands at US$4.77 billion annually, yielding total annual bilateral trade of goods and services of approximately US$13 billion. US imports from New Zealand include frozen beef, caseins, milk protein concentrate, wine, and machinery.(1)
Given the crucial importance of the US as an export market for New Zealand businesses, it’s essential for exporters to understand the market conditions in the US so they can make appropriate decisions.
Last year, corporate insolvencies decreased by four percent on the back of robust economic growth, tax reforms, and buoyed business confidence. However, that trend is not likely to continue. The GDP growth outlook is still solid but risks for the corporate sector are increasing in 2019.
US exporters are facing a strengthening US dollar and potential trade barriers. Still-unresolved tensions with China and other trade partners make the export situation uncertain.
Changing shopping patterns have already seen major bankruptcies in the retail sector and this pattern is likely to persist in the coming years. High-profile insolvencies include Sears, Gymboree, and Gump.(2) This creates a more challenging landscape for New Zealand exporters of products traditionally sold in retail stores.
Furthermore, rising interest rates are making financing more expensive. Therefore, US business insolvencies are unlikely to decrease much further in 2019 and may even level off. However, insolvencies among US businesses has continued to decline since 2012, with current insolvencies at about half the rate they were in that year.
Private consumption is driving US economic growth and unemployment has decreased to less than four percent. This has put pressure on wages, leading to rising inflation, which is expected to remain around two percent in 2019. However, since wages are rising, this is not likely to stymie consumer spending power to a significant extent.
With such high employment, business investment was able to grow steadily even in the face of trade policy uncertainty. This was further bolstered by tax cuts, deregulation, and higher government spending, which contributed to a GDP growth rate of 2.9 percent in 2018.
In 2019, the economy is forecast to grow 2.5 percent, underpinned by persistently strong household and business confidence. Domestic demand is expected to remain robust and private consumption is set to grow by more than 2.5 percent, making the US a potentially-attractive target for Kiwi exporters.
However, there are elevated fiscal and trade policy risks to contend with. Monetary policy risk has abated somewhat and the Fed is expected to slow its pace of monetary tightening in 2019 due to increased uncertainty in the global economy.
However, with such an exceptionally strong domestic economy, there is a risk that a downturn will come sooner than expected, which could mean the government doesn’t have sufficient levers to address it. Massive tax cuts and increased public spending are widening the fiscal deficit, which is expected to remain at around six percent in 2019. This will limit the government’s policy options to support the economy if there is a recession, potentially leading to a deeper downturn.
The impact on Kiwi exporters
Trade policy uncertainty is a top risk for US businesses and consumers, and it also affects New Zealand-based exporters. A downturn in the US is likely to make it harder for New Zealand exporters to continue to find a market for its goods.
US exports are under pressure due to retaliatory tariffs from China and, potentially, the European Union, although a trade dialogue with the EU is ongoing. Existing trade agreements reduce trade risks with Mexico and Canada. With China, Mexico, and Canada making up the top three import sources for the US, any uncertainty with these trade partners could present an opportunity for New Zealand exporters.
Mark Hoppe (pictured) is managing director Oceania, at Atradius – a specialist in trade credit insurance, helping mitigate the risks of trading with overseas partners.
References:
(1) https://www.state.gov/r/pa/ei/bgn/35852.htm
(2) https://www.cbinsights.com/research/retail-apocalypse-timeline-infographic/
