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Kiwi Jumps But World Still Wobbly
Thursday December 1st 2011
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.
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.