Tony Alexander

Economic Commentaries

First Weekly Overview for 2014

Thursday January 23rd 2014

This year is going to be all about interest rates rising in New Zealand as growth surges perhaps toward 4%, the unemployment rate plummets as companies scramble for already scarce employees, whilst offshore massive uncertainty about monetary policies continues. The election late this year will generate a lot of analysis but the actual impact on the economy and financial asset prices will be minimal if measurable at all.

On the currency front the NZD is likely to remain strong on the back of accelerating GDP growth, firm commodity prices due to protein demand from China and world growth rising about 0.7%, and NZ monetary policy tightening well ahead of moves offshore. But offsetting these upward pressures will be reductions in US money printing and strong US growth pushing the greenback higher, improving growth in the UK, less dire, though still lacklustre, conditions in the Eurozone, and improvements in some parts of the Australian economy. This year will likely present good levels for selling NZDs to establish long-term positions in other currencies.

On the housing front shortages in Christchurch and Auckland will not be sufficiently addressed and with net annual migration already up from -1,100 over 2012 to +19,000 last year and maybe +30,000 this year, prices will rise. Gains will spread to the regions at an uncertain pace as the initial shock effects of the LVR rules wear off. Huge uncertainty however surrounds how people will react to floating mortgage rates rising perhaps 1.25% this year and maybe 1% next as the first true monetary policy tightening cycle in a decade gets underway.

In the labour market the unemployment rate will head toward 5% from 6.2% and wages growth will lift though there is usually a lag of up to 18 months between a jobs surge and remuneration responding. Hopefully it will be quicker this time as rapid wages growth is essential for improving productivity in our economy as people move to more productive areas and inefficient businesses get closed down.

Farmers on average are likely to enjoy good prices supported by rising protein demand from China. But watch out for rising milk supply from other countries.