Welcome to the first Weekly Overview for 2016. The year has started fairly dismally for sharemarket investors and businesses exposed to minerals commodity prices. There has been record early-year weakness in some share indexes, and oil prices are almost in freefall as supply booms, dragging down other energy-related prices by association.
But does this mean we should adopt a weak outlook for the NZ economy this year? Our central message last year was that in spite of offshore worries our economy’s growth rate would be held up by many specific factors and that message remains unchanged. The construction sector is booming along with tourism and education exports. Net migration inflows are at record levels, most non-dairy commodity exports are doing well, and borrowing costs keep falling.
In fact although we still think the Reserve Bank wants to and will keep the cash rate at 2.5%, the risk that they cut one more time has increased partly because of weakness offshore, but mainly because NZ inflation yet again has come in below expectations to sit at only 0.1% for calendar 2015. That is too low although many one-off factors such as falling oil prices help explain a lot of the decline.
On the housing front Auckland has paused for now though the fundamental shortage of property continues to get worse. Investors are targeting the regions and that process is likely to continue most of this year, bringing a risk that the Reserve Bank imposes new restrictions outside of Auckland such as a 30% deposit requirement for investment purchases – especially if borrowing costs keep falling.
Regarding the exchange rate, the NZD has held up very well recently in the face of major worries offshore. Perhaps this backs up our view that with our growth outlook better than many other economies and the long-term food demand story in operation, while the NZD is likely to head to US 60 cents this year it may not stay there long.