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Economy Improving Slowly But Big Offshore Risks
Thursday October 10th 2013
This week we received two more sets of data telling us fairly much the same as most other pieces have been telling us for the past year or two. Growth in our economy looks like being good going forward, but there is still some hesitancy out there which will give canny employers a bit more time to source staff who soon will be in short supply.
Fresh calls from the Financial Services Council for Kiwis to boost their retirement savings – the same message of two decades ago, so is anything new?
Analysts are worried about housing bubbles in the UK and Australia, and ironically at a time when credit restrictions have been imposed here, in the UK the government is actively promoting lending up to 95% of valuation while in Australia investors are scrambling to buy seemingly whatever they can – increasingly off the plan.
The Americas Cup races have come and gone – well gone unfortunately – hopes of a boost to our economy from hosting the next competition have evaporated, and we’re left with the reality of a September quarter output loss due to the high number of people shirking morning work for the past couple of weeks.
The Reserve Bank did as everyone expected and left their cash rate unchanged at 2.5% this morning. But they were a bit more hawkish in their comments than expected. This simply feeds into the warning we are giving that floating interest rates will be rising this year. As regards where they peak and when – that is impossible to reasonably predict yet given uncertainties surrounding economic growth, inflationary pressures, and exchange rate movements here and overseas. But borrowers should be very careful about thinking floating through the entire interest rates cycle is a good idea. History shows NZ interest rates tend to peak higher and spend more time going up than generally forecast at the start of the rates cycle.
Generally positive data have been released in the United States this past week and that has not only contributed to the NZD rising as investors have sought riskier peripheral assets, but also pushed local wholesale borrowing costs upward. The forward track for NZ interest rates is very clear and it is just a matter of trying one’s best to pick the speed at which rates rise (very uncertain), the peaks they will reach (very, very uncertain), and when they hit those peaks (guesswork). In other words borrowers need to be extremely careful with their interest rate risk management.
Retail spending jumped firmly during the June quarter but the 8% annualised pace of growth is unlikely to be sustained. The good data however, in conjunction with some better than expected numbers in the UK, Europe, China and the United States have pushed up both the NZD this week as well as fixed borrowing costs. The latter are on a multi-month uncertain oscillation upward which borrowers should be keeping a close eye on.
The Events surrounding Fonterra caused some brief weakness in the NZD which has not persisted against the greenback or Aussie dollar but has left our currency down for the week against other currencies. The interest rate impact was minimal and it looks like this time around there will be no measurable hit to the economy as such.
Prospects for NZ growth keep improving and as forecasts get revised up so too will expectations for monetary policy tightening be brought forward in time and extra upward pressure accrue for the NZ dollar.