Chilling trade winds

After a strong initial recovery from the effects of Covid-19 in 2021, New Zealand is likely to feel the impact of slowing global trade well into 2023, according to ASB’s latest Trade Disruption economic report.

The report looks at the impact of international and domestic forces on supply chain and global trade, and forecasts what lies ahead for directors and businesses for the remainder of 2022 and beyond.

Consumer price inflation is currently tracking at an annual rate of 7.3%, the highest in more than 30 years. Much of this rise is due to higher costs for imported consumer goods, having risen by 15% since late 2019 and this is expected to rise further.

Higher import prices are hitting businesses as well as consumers. Prices for imported intermediates (oil and other raw materials) are up nearly 25% on pre-Covid-19 levels and prices for imported capital goods, which have moved considerably to date, look likely to climb given the rising cost environment.

ASB International Trade Consultant Paul Gestro says the “melting pot” has got hotter.

Six months ago, directors of New Zealand businesses were confronted with major shipping and manufacturing interruptions, paired with growing consumer demand that created the perfect storm for major supply chain disruption, he says.

Now factors such as rising inflation, labour shortages, Russia’s invasion of Ukraine, severe China lockdowns, central bank rate hikes and adverse global weather events are adding to the Covid melting pot, crippling global supply chains and trade growth.

Gestro says global forecasts have been downgraded and with New Zealand’s economy susceptible to international frictions, we can expect to see reduced demand for our exports, coupled with shrinking demand for imported goods and lessened availability.

Export demand taking a hit

Businesses and consumers in New Zealand and internationally are facing increasing costs at a time when global growth is slowing. In 2021, the country’s key trading partners recorded 6.1% growth and this figure is expected to slow to just 3.5% in 2022 and 3.4% in 2023.

As the rising cost of living continues to bite consumers in New Zealand’s key export markets such as the United States, Europe and the United Kingdom, demand for the country’s high-end commodities has taken a hit.

New Zealand’s wine and seafood exports are suffering the most with some export volumes down almost a third on preCovid-19 levels.

Meat and dairy exports remain the country’s strongest players, although exports for both are down on previous years. Prices are holding for meat and dairy, but labour constraints and bad weather have impacted export volumes. For the year ending June, whole milk powder exports are down 23% on last year and beef exports are behind about 3-8%. 

Despite global forestry supply being hampered by the absence of Russian logs, New Zealand producers are facing turbulent times. About 87% of the country’s forestry exports are sent to China where a cooling property market is curtailing demand.

Gestro says at a national level, exporters are being plagued by rising input costs and widespread labour shortages which are being exacerbated by the Omicron outbreak and constraining outputs, therefore it is unlikely export volumes will make a return to their 2020 peak until 2024.

These dynamics are being felt more so by smaller exporters, like seafood and wine producers, because they have less established trade networks and are less readily able to increase prices compared to larger commercial exporters.

Plunging import demand

With New Zealanders tightening their belts as the cost of living soars, demand for imported goods is set to slow as Kiwis reduce discretionary spending.

ASB Senior Economist Mark Smith says the early onset of the pandemic significantly changed spending patterns.

With the borders closed and Covid restrictions embedded, Kiwis, while stuck at home, splurged on imported consumer durables, including new cars. This spending is now tailing off as high inflation crimps household budgets, he says.

Higher costs, slowing demand and elevated uncertainty is impacting the business sector, with firms signalling they intend to cut back on investment, including imported capital equipment. This will weigh on economic activity this year and the cutbacks will not help in addressing widespread capacity constraints within the economy.

Shipping disruptions

Shipping costs remain at historic highs but are beginning to cool somewhat, potentially bringing some reprieve.

With some main ports congested and facing skilled labour shortages, reliability continues to be one of the biggest issues impacting businesses, having worsened since the height of the pandemic in 2021.

Smith says being unable to rely on timely deliveries of stock is putting a strain on business cash flow as it becomes harder to stagger supplies.

Despite falls of late, it is unlikely shipping costs will drop to pre-Covid levels. Smaller businesses could be more impacted as they are less likely to have well-established trade relationships and are more sensitive to geographical exposure, he says.

Despite all the doom and gloom, New Zealand still managed to ratify an upgrade to the China free trade agreement, and sign deals with the UK and the EU.

Gestro says there are some fantastic areas of collaboration across government and industry, addressing big challenges and developing some smart home-grown technology to make New Zealand an even ‘fitter’ place for trade.

The Trade Disruption report provides New Zealand businesses with critical insights into import and export markets with a focus on supply chains, allowing operators to make informed decisions and reduce risk.

Key points for directors

• Global trade outlook weakens as inflation, labour shortages and the Ukraine conflict compounds Covid-19 woes.
• Import prices continue to rise, up 15% on pre-Covid-19 levels, with further increases to come.
• Export volumes not expected to return to 2020 peak until 2024. 

The Trade Disruption report is available for IoD members online at www.asb.co.nz