By Roger J Kerr
There are two major issues the RBNZ must address in their upcoming 10 March monetary policy statement:-
Firstly, what is the current GDP growth rate of the NZ economy and how will that sustain through 2016 and 2017? Secondly, what do those growth rates mean for inflation across the NZ economy?
There is no question that the economy bounced back very strongly over the second half of 2015 following the temporary loss of confidence and dip in activity levels when dairy prices plummeted mid-year.
The RBNZ slashed interest rates in response to the dairy situation in June/July expecting that the whole economy would turn down in response.
They were wrong.
Every industry sector outside dairy has experienced robust trading conditions over the last eight months, resulting in annualised GDP growth returning to above 3.00%.
We will not get the official GDP growth numbers for the December 2015 quarter until 17 March, however judging by the ANZ Regional Trends survey results that was released last Friday, it appears that the economy expanded by over 1.00% over that quarter. Annualised (as the Americans like to do) that is 4.00% growth.
The historical correlation between actual GDP growth and the ANZ Regional Trends survey has been very close over the years. The Regional Trends survey increased by 1.8% in the December quarter, the largest quarterly increase in 12 years.
The expansion was broad-based across the country and the logical conclusion is that we will start to see pressure points in the economy this year that can only lead to price increases.
Anecdotal evidence from retailers is that price increases for imported consumer goods due to the currency depreciation over the last 12 months are now occurring, some as much as 10% in quantum.
The plunge in oil and other commodity prices in the last year have overshadowed and disguised building inflationary conditions elsewhere in the economy.
On the premise that oil and global commodity prices continue to bump along the bottom over the balance of 2016, the forces keeping our annual inflation rate below 1.00% to date will no longer be present.
The correlation between GDP growth and annual inflation may have broken down over recent years, however there is no denying the long-term relationship.
The US economy is now experiencing annual price increase at 1.70% reflecting their economic recovery and stronger employment environment.
There is nothing to suggest that the NZ economy has caught the Japanese/European deflation disease, we are more like the US.
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Roger J Kerr is a partner at PwC. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com
16 Comments
Methinks Roger J Kerr is being more than a tad optimistic about inflation .......... there is every bit of evidence of a general level of a fall in prices( other than Auckland housing and trades wages )
EVERYTHING is cheaper than it was a year ago , food , cars ,petrol , diesel , interest rates on mortgages , airfares , clothing , consumer goods , electronics , whiteware, .
The only things that have mot come down is fresh and the price of a litre of milk , its now viable to import long-life milk from Australia , so a drop is coming .
Just 15 months ago top economists from around the world were telling us inflation and interest rates would be rising and the RB put up the OCR.
Suddenly and without warning everything went into reverse.
Conversely, there is absolutely nothing to stop interest rates to go up in 6 months.
A crystal ball would be a better indicator of inflation and interest rates than "expert economists"
If we knew what was going happen, we would all be rich.
Eventually highly leveraged property investors will be taking a bath, especially the ones on interest only mortgages.
Actually more like keep saying it will stop raining, because it has in the past. yet it hasnt, and that sums up the issue, ie When a paradigm shift occurs those trying to predict the future by only looking back and cant seem to get around the fact they are consistently wrong (for 8 years? now).
What paradigm shift was that? Are you suggesting there will never be any inflation ever again based on there having been none for eight years. It's hardly a great deal of time in the greater scheme of things to my mind :-). I always find your posts oddly confusing.
Roger, with all due respect, inflation is only happening in the building trades, whether it be new builds or renovations of existing buildings and sales (residential and commercial) local body rates and compliancing costs etc .....all this plus the "ticket clippers" of RE agents, lawyers and accountants etc all eeking out a living from this "property boom".
If this data was inputted into the NZ "inflation" figures, these would be way higher for this economy.
So apart from the above, where else is there "inflation" ?
Also, I detect an element of "vested interest' in you writings, as of course as interest rates rise, you can further "clip the ticket'", as your speciality is in 'fixed interest' securities .......
I can understand your argument if you are saying that the swaption market is not valued correctly i.e. that the swaption premiums are too expensive based on the Black-Scholes or whatever model you use. That would be bad advice. However if you are saying that because an option expired worthless means that you should never have paid the premium is a bit like saying you should not pay the premium on your house insurance if it doesn't get burnt down.
It's raining, so no golf, but then along comes Roger to brighten my day. I wonder what he makes of the ANZ article explaining why they have now joined the chorus calling for OCR cuts?
How does he account for the fact that inflation has been below the 2% target for 5 years now. This longs precedes the fall in oil, dairy and the dollar.
Let me quote from the latest Westpac Institutional Bank survey of inflation expectations; Across a range of measures and horizons, we have seen a downshift in inflation expectations. Some of the most reliable measures(including the RBNZ's own medium-term two year ahead measure) are now WELL BELOW 2%.
Personally,I would be happy to see inflation at or near 2%,but I fear that global deflationary forces will make this impossible.
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