The full pdf version of the Weekly Overview is contained here.
NZ Growth Slow – Watch Over-optimism
Friday October 28th 2011
This week I am in Europe giving talks and learning about the European economy and make some observations on the latter subject in the Foreign Economies section.
With regard to interest rates the lower than expected NZ inflation outcome for the September quarter, fall in Fonterra’s forecast payout, rebound in the currency, falling business confidence, and a probable cut in Australia’s cash rate next week all argue in favour of staying floating. Having said that I stick with my long held view that if I could get a two year fixed rate at 6% or three year rate at 6.25% (or thereabouts) I would take it.
Fresh NZ data have been thin on the ground this week and offshore the glass half full interpretation of the European debt crisis has kept markets calm and financial asset prices (exchange rates, interest rates) not much changed from where they were a week ago. The focus for markets around the world this coming week will be the EU Summit over the weekend at which more details of how the probable Greek debt default and its impact on bank capital bases will be handled. We have some good insulation from global events still coming from strong dairy prices which rose over the week. But if the European debt situation deteriorates it will hit world growth and export prices.
This week the interpretation of Europe’s debt crisis has shifted to the glass being half full and that has resulted in a rise in the Kiwi dollar and some upward movement in wholesale interest rates. These changes have come about in spite of generally weak data yet again appearing for our economy. Our monthly survey has shown a sharp decline in optimism for the coming year, and core retail spending using debit and credit cards in September rose only a small 0.6%. But we have also seen the release of some better than expected statistics in Australia – hence a fall in the NZ dollar to below AUD78 cents.
This week we take an in-depth look at the issues in Europe and the United States, look at the Australian and Chinese economies, then run through the linkages between NZ and these economies, how we have some domestic factors supporting growth, and what the broad implications for business management are of the very uncertain outlook facing the global economy.
Much as we have a positive view about NZ growth on the back of eventually rising farmer spending (of which there is evidence) and the rebuilding of Christchurch, one would be foolish to ignore the clear downside risks to growth posed by the deteriorating global outlook which we have been writing quite a bit about in recent weeks. Greece is continuing its march toward some sort of default, French and German governments are putting plans in place to shore up their banks for the losses they will suffer on Greek government bonds, the data out of the US remain poor, the OECD leading index has fallen at its fastest pace since early-2008, and in Australia business sentiment has fallen away anew as the unemployment rate rises.
The 2012 battle – domestic strength vs. offshore weakness
Thursday September 8th 2011
This week we have not learnt much fresh about the NZ economy beyond the second quarter in a row of 6.6% shrinkage in construction. Offshore the story has been one of rapidly falling markets in the first part of the week on deepening worries about the US economy (no jobs growth) and the European sovereign debt situation. Pessimism has eased off over the past two nights but it seems inevitable that it will return and generate continued volatility in the NZD whilst limiting the extent to which medium to long term NZ interest rates rise in the near future.
In this week’s Overview we introduce a new section looking only at the leading indicators of NZ growth. The data suggest strong growth next year, but there are two caveats. First, old relationships between high business sentiment and strong growth may not hold, Second, the world outlook is getting worse.
This week we have seen confirmation of a deteriorating trend in NZ net migration flows, some better than expected retail spending growth during the June quarter (though a lot of it could be discounting related), little overall movement in the exchange rate or interest rates, and continued volatility offshore though with a slightly less negative bias manifesting itself as a sharp pullback in gold prices.