We know that many of our rural customers are concerned about what this means for them so we sat down with ASB Rural Economist Nathan Penny to ask him some questions about the possible effects.
Was this outcome a surprise?
Yes it was. We can see from the massive movements in the markets since the results were announced that it was unexpected. A lot of the UK was undecided going into this, and traditionally people who are undecided in these types of things tend to vote for the status quo. But in this case they didn’t.
This is happening on the other side of the world. How does it affect New Zealand?
There are a few different ways that it affects us. The first thing we’ve seen it have an immediate effect on is the New Zealand dollar. It’s lifted hugely against the Pound, going from in the high 40s to closing in on 55 pence currently.
The second thing is that Brexit has created a lot of uncertainty. Central banks around the world are probably not as confident that the global economy will grow as fast this year. For New Zealand, this means we think the RBNZ will go ahead with interest rate cuts this year.
And the third thing is that stock markets have been affected. Here in New Zealand that is likely to have affected some KiwiSaver members; at least in the short term.
Can you explain how it’s affected the exchange rate and what that will mean for New Zealand farmers?
Our dollar is now stronger against that Pound than it was. For farmers and other exporters, the returns in New Zealand dollars are going to be lower. That’s going to mostly affect things like lamb and wine, for which we sell a substantial amount to the UK.
It’s also going to make our products more expensive in UK stores so people may not buy them. There are also further effects if the UK goes into recession; people will probably stay away from luxuries like lamb and demand may fall.
How will Brexit affect New Zealand dairy farmers?
It shouldn’t mean too much because the UK isn’t a big agricultural producer and it’s not a big importer either. But there is a lot of uncertainty at the moment. If the UK goes into recession, if then that spills over into Europe, then that impact could spill over into places like China. And China is a big market so then it’d be a problem. At the moment it’s not too big of a deal, but it’s a risk.
We also know that British dairy farmers were already struggling so if Brexit tips them over the edge, then some dairy farmers could exit the industry – and that could mean more demand for New Zealand dairy. So, on the flipside that could have positive effects for New Zealand dairy farmers.
We’re watching to see what will happen because, at this stage, dairy could go either way but we don’t see the effects being huge.
Are the effects immediate or will they be delayed?
It’s a mix. With currencies, it’s largely immediate. With interest rates, we’ve seen those markets have moved already. Share markets have moved too. The effects on lamb will be fairly immediate. With dairy, there will be more of delay – so we’ll be seeing how it plays out over the next few months.
What effects on trade between New Zealand and the UK will we see?
We might get a better deal with the UK, but ultimately it’s going to take a long time. They’ve got years of negotiation with the EU ahead of them so that’s likely to be their main focus.
Will this affect our trade relationship with Europe?
In theory it shouldn’t do. We’re actually renegotiating our trade agreement with Europe right now. But these negotiations might get put on hold or slowed down as Europe focuses on its negotiations with the UK.
What are we expecting to see over the coming months?
There’s a lot of uncertainty at the moment so things are going to be pretty volatile. We know that for the UK there are a lot of political issues ahead. Key things like the appointment of the new Prime Minister and starting the process for departure from the EU will be key moments where we’ll see things in markets move.
In terms of further effects on the global economy – we know that in times of uncertainty businesses don’t look to grow or invest as much as they normally would. Similarly, consumers start to defer spending, or they get more conservative with their purchases, tending to stick to the essentials. We know that these sorts of things are very likely to happen in the UK and, to a lesser degree, the EU. The bigger question is whether this uncertainty spills over to other markets important to New Zealand. So far, prices in agriculture markets have generally held up, but it is a risk that those markets will also weaken over time. In that sense there is a lot more water to go under the Brexit bridge.
For more information about the effects of Brexit on the agriculture landscape, read Nathan’s Farmshed Economics Reports and and ASB’s economic reports.