Retail sales data out this morning tell us that spending is growing at an above average pace. But areas of greatest strength are where prices have been falling. Consumers are seeking out bargains in an environment of low wages growth not yet being offset by rising employment and the fastest population growth (1.5%) in a decade.
We also take a quick look at dairying and combat some of the more sensationalist talk recently about the sector facing grim times with analysis showing this season’s over 30% fall in likely payout is consistent with a six year pattern of such declines.
This week we have seen dairy prices fall another 8.4% yet the NZD has held up because most news for the rest of the world from the Middle East to the UK, Africa, Europe and China has been negative. Locally the NZ unemployment rate has fallen to 5.6% from a peak a couple of years ago of 7.2% but there remains very little evidence still that wages growth is accelerating. This will come but clearly with still a lot of bad news offshore and some extra people becoming available from Australia employees remain more focussed on job retention than gaining extra wage increases.
I am back from leave now so here are my latest thoughts on the economy following a period of some weaker than expected numbers but a near universally expected hike in the official cash rate again this morning. Further rate rises will come but not for a very uncertain time between December this year and June next year.
This week we take a quick look at the monthly migration numbers showing booming net inflows. The housing implications are fairly obvious and although the boom will make the Reserve Bank more inclined to raise interest rates the ongoing strength of the NZ dollar is an opposing force. The RB will therefore probably pause after the expected July rate hike and not start up again until December.
In the Housing section we offer a new way of looking at why we look at Auckland, continue to move there, and therefore keep house prices there rising at a faster pace than the rest of the country.
The NZ dollar meanwhile has strengthened further this week and our expectation remains that it is going to stay high. After all, this week we saw the release of weaker than expected GDP data in the United States and manufacturing gauges in Europe. Yet in China the manufacturing number was good and that actually adds to NZD support given our high and rising exposure to the Chinese economy.
These past two days I have been yet again at National Farm Fieldays, so start off this week’s Overview with a few observations on the sentiment and concerns of the many people I have been chatting with. This morning the RBNZ raised the cash rate 0.25% to 3.25% as near universally expected. But they disappointed some erroneous optimists hoping that they would signal a pause in July when they retained the same projected interest rate track as released three months ago. The factoring in of higher interest rate expectations has pushed the NZD up by one cent today to sit two cents higher against the greenback than a week ago.
This week we again remind employers to take the tightening labour market into account when setting their strategic plans, and to be aware that after six or more years of telling staff that poor cash flows mean wages growth must be minimal, the line is running a bit stale now that GDP growth is soon to exceed 4%.
Recent cuts to fixed interest rates for terms of three years or beyond mean that were I borrowing now I would place 80% of my debt into either three year fixed rate at 6.25%, or a four year rate at 6.59%, recently cut from 7.19%. Our floating rate is currently 6.24%. In a couple of weeks when we expect the official cash rate to rise again we expect floating rates will rise 0.25% as well, and at this stage looking out to 2018 one struggles to see when rates will start to cyclically fall from levels about 2% higher than they are now. Fixing medium to long term seems like a no-brainer. Unless you think something very bad economically will shortly happen and rates will fall.