Should I stay or should I go now? Yes, these are the well-known lyrics from The Clash, but it is also a question which gripped the world as they waited with baited breath to hear Britain’s decision about its status in the European Union. To the shock of much of Britain – and the world – on 23 June it voted to leave the EU to stand as an independent economy.
But the ramifications of this decision are far reaching, trickling all the way down under to New Zealand, and economists are weighing in with their financial predictions.
So, what could Brexit mean for Kiwis finances?
According to BNZ’s market outlook, the economic impacts of Brexit to New Zealand are expected to be limited – but probably negative in the case of meat exports and tourism operators. New Zealand’s goods exports to the United Kingdom – mostly sheep-meat and wine – comprise 3.5% of total exports. Imports from the UK – mostly transport goods – account for 2.7% of the total imports.
While BNZ says it is too early to draw any firm conclusions on the effect of Brexit on New Zealand’s monetary policy, the bank predicts it will increase the odds of the Reserve Bank of New Zealand (RBNZ) reducing the Official Cash Rate (OCR).
In March 2016, RBNZ reduced the OCR by 0.25% to 2.25% for two main reasons: falling inflation expectations, and concerns about the global economy.
Traditionally, bank interest rates have followed in line with changes to the OCR – although banks do also take other factors into account. A low cash rate doesn’t necessarily mean lower interest rates at the bank, but it is likely. This could be great news for First Home Buyers and other house buyers who are out comparing home loans. However, for those who have their money in savings accounts and term deposits, a lower OCR may not come as welcoming news.
RBNZ reviews the OCR eight times a year. The next announcement is due in August 2016.
Brexit predicted to curb UK-to-NZ investments
New Zealand’s economic relationship with the UK
|Linkages||Why is this important?|
|Exports of goods||UK accounts for $1.7 billion (3.4% of total) of goods exports; important items are sheepmeat, wine, apples and pears, wool and honey. Most primary products enter UK under preferential arrangements negotiated with EU.|
|Exports of services||New Zealand exports $1.6 billion of services to the UK (7.7% of total), primarily tourism-related services (around 75% of total, for over 200,000 UK tourists) but also business services (legal, advertising, architecture, engineering) and audiovisual services.|
|Imports||UK supplies $1.3 billion (2.6%) of our goods imports, largely vehicles, engines, machinery, spirits and books. Most imports are important intermediate inputs to New Zealand firms’ production. We import $970 million of services from the UK (primarily tourism, insurance, broadcast rights, business services).|
|Foreign Direct Investment into NZ||UK has a stock of $4.2 billion (4.4% of total) of FDI in New Zealand.|
|Outward Direct Investment into UK||New Zealand has a stock of $1.5 billion of ODI in the UK (6% of total).|
|Permanent migration||Over 13,000 UK residents permanently migrated to New Zealand last year (11% of the total migrants). Almost 10,000 Kiwis went in the opposite direction.|
Source: New Zealand Institute of Economic Research and Statistics New Zealand
Prior to Britain’s announcement about its EU status, the New Zealand Institute of Economic Research did some crystal ball gazing into the potential effects of Britain leaving the EU.
In a report, deputy chief executive John Ballingall said New Zealand can expect a cooling off of any UK investments into New Zealand.
New Zealand and the UK have a substantial investment relationship, with the UK holding a stock of $4.2 million in New Zealand.
“We might expect UK investors to become more risk-averse while the Brexit carnage plays out, and that could limit the extent to which they see investment in New Zealand as a priority”, Mr Ballingall says in the report.
NZIER also agrees UK could look elsewhere for their investments, as they way for the political and economic situation to settle.
“Since New Zealand is rarely seen as a low-risk investment destination due to our small scale, geographic location and susceptibility to global economic shocks, this could see a marginal dampening of investment flows into New Zealand,” the NZIER report states.
How could investment changes affect Kiwisaver funds?
Slower investments could affect Kiwisaver funds because most Kiwisaver funds have at least some of their investment in share markets. These funds are therefore susceptible to the volatility affecting those markets – in this case the uncertainty caused by Brexit. If share prices drop, the portion of a Kiwisaver account which is invested in those shares will drop as well.
No absolutes with Brexit
While this might all paint a picture of doom and gloom, it’s important to remember these are only economic predictions for now. Time will tell how it affects New Zealand.