The full pdf version of the Weekly Overview is contained here.
First Overview For 2012
Thursday January 19th 2012
I hope everyone has had or is still having a good break. I am currently in Guangzhou checking out the scene here and in Hong Kong for New Zealand companies and will this year, as indicated in the last few Overviews for 2011, be writing about the opportunities presented by China’s two century overdue return to producing over 25% of world GDP. This week the Overview commences with a discussion on that issue but we also look at the economic data for NZ which have appeared over the past five weeks. What they tell us is essentially the message being put across here for almost all the second half of 2011. Our economy is weak and interest rate pressures minimal.
Merry Christmas everyone and Happy New Year. It would be great to be able to say that the year ends well for ourselves and the world economy and that we can look forward to good economic conditions over 2012 with our growth driven by higher business investment and exports, unemployment falling away, and commodity prices holding firm. But some recent data releases in New Zealand have been weak – retailing, manufacturing and construction. And more importantly, the situation in Europe is getting worse and spreading around the globe.
This week we have included extensive coverage of the NZ real estate market using data and feedback from our two monthly surveys along with discussion of the monthly Barfoot and Thompson data for Auckland and The Economist magazine analysis suggesting NZ house prices are over-valued 25%. We look also at some fairly weak manufacturing data released this morning (non-meat and dairy processing down 1.1%), the reasonably well entrenched downward trend in spending on cars revealed in monthly registrations data, and a 2.3% fall in construction during the September quarter.
This week the Kiwi dollar has jumped over three US cents on the back of moves by central banks to shore up US dollar funding for European banks. But the deterioration in Europe’s fundamentals continues with growing debate about potential break-up of the Euro. The next few weeks promise to be very volatile.
Domestically we have seen further evidence of good growth in imports of capital equipment into New Zealand but flat investment in commercial property while an underlying positive trend continues in consent numbers for dwellings. Next week the Reserve Bank will review the official cash rate and we expect no change even though they are likely to downgrade their forecasts for growth in the coming year. The general election results have had no impact in the markets.
We have not learnt anything meaningfully new about the NZ economy this week and the story remains one of some upward bias to consumer spending data this year because of the Rugby World Cup and substantial distortion in data because of other factors such as earthquakes. Looking ahead prospects for NZ growth look good on the back of a coming period of strong residential building, the feed-through of spending by farmers, generalised catch-up spending by consumers on items other than TVs (already purchased for watching the rugby), and setting up of companies deserting Australia as labour costs take off.
This week started off with the world looking like a slightly less worrying place with the successful appointment of new leaders in Greece and Italy with strong mandates to implement deficit-busting and eventually productivity promoting economic reforms. But as we know in NZ the short term impact of such changes is invariably negative and the markets perhaps have started to factor that in because as the week has advanced worries have once again grown. (more…)
My main message over the past few months has been that growth in the NZ economy has as good as stalled and that the offshore situation risks getting a lot lot worse bringing extra weakness for us next year and offsetting some of our big positives expected to kick in “At Some Stage”. Nothing that has happened this week dissuades me from this view. To whit..
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.