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Opinion: Weak 2010 is no guide to a stronger 2011 outlook
By Roger J Kerr
The local interest rate market commences a new year with very little change to outright rates and yield curve shape from the levels of late December.
The negative GDP number for the September 2010 quarter released just before Christmas was taken as further evidence by the doomsayers that the NZ economy was tanking and heading back to recession.
The subsequent commentary from economists was that the RBNZ would not have to increase official interest rates at all in 2011.
However, the marginally weaker economic performance in July, August and September last year was largely due to lower agriculture and manufacturing output for unrelated reasons.
I do not read too much into those weaker numbers and still contend that the super high export commodity prices will drive increased production, output and investment in the primary sectors this year.
Likewise the low NZD/AUD exchange rate will drive increased manufactured/food exports to Australia, increase Australian investment in NZ manufacturing and also lift the already stronger Australian tourism arrivals into New Zealand. The domestic retail and construction industry sectors were not markedly weaker as the doomsayers had been predicting.
It would be very unwise to extrapolate the flat GDP growth numbers experienced through the middle six months of 2010 and conclude that 2011 will be the same.
Apart from the current high NZD/USD exchange rate hurting exporters, all the stars are in alignment for stronger GDP growth in 2011. Add on the Canterbury earthquake rebuild and the Rugby World Cup positive influences and the stage is set for the doomsayers to be proved horribly wrong.
Activity levels in the domestic economy over the first half of 2011 will be determined by whether the extra income into rural pockets is utilised solely to repay debt (as the doomsayer economists and the RBNZ forecast) or whether some is spent on consumer and other items. I think the latter scenario is much more likely. Certainly the bargain prices for electronic gizmo’s (helped by a favourable 0.7600 NZD/USD exchange rate for importers) make it very attractive to upgrade and up-size!
Retail sales look like they will be up marginally 1% to 2% on the previous year with the positive early December numbers fading towards Christmas due to poor weather and the lack of a weekend for shopping immediately ahead of Christmas day.
The NZIER quarterly survey of business confidence (QSBO) is due out this week and should display improved confidence levels.
My view is that all the economic data releases over the first three months of 2011 will prove to be better than expected and gradually there will be a realisation that +3% growth does bring inflation risks later on and thus the current “super-loose” monetary policy settings with the OCR at 3.00% are just not appropriate for the economic outlook.
As stated last year, by the time the RBNZ have the hard economic evidence they need to remove the monetary stimulus, it will already be too late and thus force them to lift official rates rapidly from March/April onwards. In addition to the RBNZ’s expected U-turn on the NZ economy, the improved global economy in 2011, led by the US and Asia, will also be aiding a stronger NZ economic growth outlook.
Net result of the economic changes will be a sharp increase in the one to three year swap interest rates from March onwards. The four to ten year swap rates will continue to be determined by US Government Treasury Bond yield changes, and those rates are only heading upwards.
* Roger J Kerr runs Asia Pacific Risk Management. 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