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Caution Still Required
Thursday October 13th 2011
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.
The week has been a tumultuous one with the NZD falling at one point to 79.7 cents – making for a nine cent range over a ten day period – sharemarkets here and overseas tanking, and forecasts for growth being slashed while interest rate rise expectations have been pushed well out. In fact in the US no rate rises are now planned for at least two years according to the Federal Reserve and that factor will tend to keep NZ long term borrowing costs low thus removing a lot of the threat of sharply rising fixed interest rates here.
The Reserve Bank met market expectations this week by leaving the cash rate unchanged at its record low of 2.5%. But they warned of rate rises ahead and we think risk averse borrowers might want to consider placing up to 50% of their debt at a fixed rate probably for three years. But huge uncertainty continues to swirl around the world economy and whatever one forecasts today is sure to change in coming months.