By Roger J Kerr
Local economic analysts and commentators who think the Reserve Bank should slash NZ interest rates a lot further yet to 1.50% because the world economy is apparently on the brink of a deflationary/recessionary spiral down, may need to think again.
To be fair, some parts of the global economy have their problems with continuing deflation/no growth in Europe and oil/commodity producing economies such as Brazil and Russia sliding into recession. However, economic growth is reasonably robust and inflation far from dead in the US, China and Australia.
Inflation here in New Zealand, whilst very low on an annual basis due to the plummet in oil prices over the last 12 months, is not actually that benign as the March quarter’s CPI figures on 18 April will confirm. The upward pressure on our building costs should continue despite the slow up in residential re-build in Christchurch. Commercial and industrial construction activity levels in Auckland, Hamilton and Christchurch remain strong. On top of that major projects such as the Transmission Gully road in Wellington and the Sky City Convention Centre, Commercial Bay project and railway tunnel in central Auckland will further stretch resources in the construction sector.
Wage increases have been low to date due to inward migration numbers, lower mortgage rates and lower motoring costs for households reducing the need for pay increases. These favourable conditions for both employers and employees are unlikely to repeat over the next 12 months, therefore the labour market demand/supply equation will start to change.
Turmoil in global share markets in January caused safe-haven buying of US Treasury Bonds that forced a reduction in 10-year yields to 1.70%.
The US bond market has moved sideways over the last two months as the weight of cash sloshing around the world holds the yields at the lower levels.
It appears that only strong GDP growth and higher inflation in the US will prompt bond investors to reduce their buying and portfolio durations.
The US employment gains and manufacturing data for March were again impressive, which suggests that the argument that global risks could de-rail the US economic recovery is not so convincing.
It was expected that rising US short-term interest rates in 2016 would push Treasury bond yields up. To date this expected outcome has failed to materialise as Fed Chairwoman Janet Yellen appears overly cautious about global risks.
At some point over coming months the bond market should recognise that US economic trends are actually more important than worrying about whether the Chinese can maintain their 6.5% growth and bond yields should lift.
As we have stated many times over the last nine months, the Chinese have both fiscal and monetary policy leverage to ensure their economic growth achieves their 2016 target. The western markets should comprehend this by now as the Chinese have pulled these levers in August last year and again in January this year to settle and calm volatile global financial/investment markets.
Global economic risks continue to be overstated in my view and eventually the financial markets will reflect that risks have reduced since January.
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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
10 Comments
They're talking about stagflation setting in in the US. Given that a lot of people are struggling to get by over there it's not going to improve in the short term.
There's also considerable risks from all the bubbles in every market. What's going to hit breaking point next?
I think it must still be April 1st and The article is yet another of Roger's little jokes. He still believes that official Chinese GDP figures are for real(they're not)-the oil price will just keep rising(it won't and has started to fall back to the mid $30s)-the dairy price will rebound soon(it won't and could fall further) and that importers will soon be raising prices sharply on the back of a falling currency(they won't and anyway, the currency is rising, not falling).
Finally, still in his own little imaginary world, he knows much more than Janet Yellen about the American economy and as soon as she catches up with his analysis, US rates will soar.
I wonder what it's like to live in Roger's fantasy land?
The fact is, the construction industry needs an overhaul. The industry behaves like a monopoly. Govt and council land policy is a shambles. The supply side needs rogernomics style deregulation. Bring in aussie cost scales and open up huge new areas in each major town and city for development. Or stop immigrants from moving here. If they don't sort that mess out, the financial RISK won't be overseas, it will be at our front door.
I also find the comment that the US jobs data is a positive announcement. If Roger had cared to look into the data he would see 51% of new non farm payroll hires are actually low paid and part time jobs. Middle class jobs are disappearing! The other factor hidden in the data is that people 55 and older are returning to the workforce because they can not generate any passive interest income in the zero rate environment. There is no productive industry in the US. It has all been exported in the interests of driving down costs of production. Back to the job data - look at the labour force participation rate. This has not recovered since the GFC of 2008. In EVERY other recovery the labour force participation rate has recovered but not this time. US have printed Trillions of dollars and all they can do is "stand still".
I'd like to pull up this article on RISK in 12 months time and see how correct it is then. Where is the conversation on world GDP? This is the RISK. And every dollar of additional debt creation will have less and less of an effect on creation of GDP in an effort to get people to spend.
Inflation is low in NZ because the world in entering into a currency war. Look at south east asia. The devil is always in the detail and to believe that things are just rosy indicates the writer of this article has failed to look below the headline data and obtain the real picture.
As for the current political system this country has, we have a government which has smart people in it but they choose to construct policy which will get them re-elected and not policy which is good for the country. We have an collection of opposition parties which are also full of smart people but they fail to do the same. the only way to change a government is to have a credible government in waiting. This is not what we have. The collective political parties have stripped this countries assets over 30yrs and enslaved us in debt and destroyed our productive manufacturing base while fostering policies which have made it harder and harder for the middle class to prosper. The only person who seems to have even the slightest interest in NZ is Winston Peters, however his approach is not ideal in the way he politicizes some issues for his own gain which is in a way what all political parties do. Where will the country be in 30yrs? Similar to argentina I suspect. We need a revolution and it starts with an overhaul of the political system and a gold backed NZ dollar.
Keyzer Soze "Every morning I wake up and thank God that Roger isn't the RBNZ Governor" haaa haa bloody funny, best on here for a while. I'd like to know in all seriousness why Roger gets to contribute to this website - seriously I would, not joking, happy for someone to shoot me down..............
Roger - have a look at this link. This projects -1% inflation (more accurately termed "price deflation) by the end of 2016. How does that compare to your research?
I think you will find the below website is very reliable. Link attached
http://www.tradingeconomics.com/new-zealand/inflation-cpi/forecast
Very interesting
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