Why are we still spending so much overseas?

According to figures out yesterday, New Zealand corp has greatly increased its spending overseas over the past year.  In part this seems crazy since we have been in a recession over the past nine months – however, there are reasons:

  1. Our exchange rate fell (assuming demand is inelastic – or is not passed on through intermediaries),
  2. The price of imports (specifically food, petrol, and intermediate goods like fertilizer) has risen,
  3. Businesses wanted to invest before our dollar fell below “fair-value”,
  4. Higher prices for our exports have made imports more affordable.

Note that the first two reasons solely drive the increase in prices – while the later two work through greater volumes of imports.  When the terms of trade numbers are out we will be able to see which bit dominates 😉

Furthermore, our recession over the first half of the year was the result of a “temporary” shock – through petrol prices and drought.  As a result of this, people in New Zealand will increase borrowing in order to “smooth” consumption over time – as the goods aren’t here, this involves borrowing to buy goods from overseas.

With the price and availability of credit now rising, and the exchange rate below fair value, I would expect import values to start declining – what do you guys think?

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  • dave

    Yes to #3, my little business spent up large on computers and peripherals last month ahead of the currency collapse. I should have enough to keep me going for a couple of years now.

  • Hi Dave,

    The third argument is actually a pretty popular one for a country like NZ. The fact that capital imports are still relatively elevated (they are down on the June quarter – but that is because there was a whole bunch of Tui-oil field equipment shipped in over April).

    If this is the case we should see quite a drop in capital imports over the coming months 🙂