It seems like only yesterday people were extolling the virtues Ocean's economies and calling for perpetual strength in their currencies. What a difference a crisis makes. In the case of New Zealand, once a white-hot currency pick for dollar bears, the strengths of the economy have become its weaknesses.
After enjoying a nice bull run on the back of high interest rates, burgeoning current account surpluses, and strong foreign direct investment, the New Zealand economy has hit the skids-and hard. The currency has followed suit, down nearly 25% in 2008 and on the decline thus far in '09, as well. More weakness is likely as the central bank lowered rates by a stunning 150 basis points to all time lows yesterday, and it almost certainly isn't done yet.
Add this to a widening current account deficit of 3 billion for the December year, and you have a Joy of Cooking-style recipe for currency weakness. The property market in New Zealand was, just like in the United States, a big source of consumer spending. What can't be ignored with regard to this economy is that with a property market well in excess, as a percentage of GDP, of the housing market here in the U.S., weakness in this sector is likely to have a more profound impact on the New Zealand economy. This is now being reflected not only in official economic data, but in the currency market's treatment of the New Zealand Dollar dollar.
The lesson here, as always, is to never underestimate the ability of ancillary economies to shift on a dime in either direction. The good news for those who feel we may be coming out of this economic firestorm sooner than later is that commodity economies like New Zealand could recover quickly. The bad news for those expecting prolonged economic weakness is that the New Zealand economy is likely to see key indicators continue to deteriorate. It is therefore wise to be cautious at this juncture with regards to investment in New Zealand and similar economies, to hold them in the proper proportion within one's account and to view them as providing enhanced exposure to either global growth or weakness.
In other words: New Zealand can be expected to outperform in healthy economic times, and to clobber you in times of weakness. Diversification and proper portfolio sizing are key.