Roger J Kerr says the NZ economic outlook remains positive and we should look out for economic forecasters soon backtracking on predictions of a 'stalling' economy

Roger J Kerr says the NZ economic outlook remains positive and we should look out for economic forecasters soon backtracking on predictions of a 'stalling' economy

By Roger J Kerr

The world of NZ interest rates continues to be a game of two halves, short-term rates out to four years forward dominated by the RBNZ’s monetary easing bias, whereas four to 10 year swap interest rates are determined by movements in US Treasury Bond yields.

Whilst US bond yields have pulled back to 2.13% from 2.30% on the Fed’s non-decision on interest rates last week, stronger US economic data and Chinese selling of their bond holdings both point to higher yields going forward.

It still remains very difficult to see US long-term interest rates going downwards when their short-term interest rates are being lifted by the Federal Reserve. A continuation of the local moneymarkets pricing in another 0.25% cut in the OCR, but rising US long-term interest rates will steepen the upward sloping yield curve even more so over coming weeks.

GDP growth figures of just +0.4% for the June quarter released last week were something of a surprise as the only sector to really weaken was manufacturing. Other lead indicators for manufacturing such as the PMI indices point to contrastingly fairly robust activity levels. Manufacturing exporters selling in USD, GBP and EUR have received a massive boost from the lower NZ dollar exchange rate, however this takes a few months to transfer through as legacy currency hedging has to be worked through first.

The interest rate market’s next focus will be the CPI inflation numbers for the September quarter on 16 October.

We should see the first signs of increasing prices on imported consumer goods due to the NZ dollar depreciation over the last 12 months. Anecdotal evidence is mounting that significant price increases are already on the way. The RBNZ will be examining such price trends closely before deliberating on the next OCR review on 29 October. It should be remembered that the RBNZ reversed engines and slashed the OCR back in June because of tumbling dairy prices. The speed of the recovery in dairy prices over recent weeks will be causing another rethink at the RBNZ on their 2016 growth and inflation forecasts.

No great surprise that local corporate borrowers Powerco and Air New Zealand have announced new corporate bond issues over this last week. The debt market conditions a very conducive for tapping the strong investor demand currently. Mum and Dad retail investors are suffering from lower deposit rates from the banks and are being attracted to longer dated corporate securities with a 4% return handle.

Borrowers and investors should be watching out for upcoming backtracking from economic forecasters who have previously painted a picture of the NZ economy “stalling”, “spluttering” and “struggling” over coming months.

There is no evidence of the economy behaving in such a manner.

New vehicle registrations are at a record high level, which is reflecting positive economic confidence, even if the business confidence surveys have taken a hit from negative media headlines on China, dairy prices and volatile equity markets.  Economic growth has eased back from a +3% pace to a +2% pace, however further increases in wholemilk powder prices and the stimulus from the low exchange rate/low interest rates bode well for rising incomes, jobs and business investment


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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

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Yes, the current economic outlook for the world is absolutely awesome Roger!

Could you please enlighten your readers why the Fed didn't lift rates last week when the outlook is so positive?

Whatever he's been smoking for 7 years, he should share, its good stuff!

No evidence of the economy stalling? What about 0.4% growth, rising unemployment and the huge drop in dairy prices?

Australia ASX is down -2.41% as at 1.28pm NZ time. Not such a great way to start the week aye Roger?
http://money.cnn.com/data/world_markets/asia/

I can not share your positive outlook Roger and not sure why you and others insist upon using outdated methods of analysis......I feel they have no standing in current economic predictions so are therefore negative methods as the accuracy of such measures of performance are not a proper indicator of the SME economy....and it is SME's who contribute by far the biggest amount in taxation and it is what is left after taxation and other Government enforced costs that is a true measure of any economy.

Who gives a toss how many vehicles are sold? Anyone who has a business entity can get that GST back, claim depreciation sell a trade-in at book value from the business entity to themselves and then sell the said vehicle off for a above book value blah blah blah......when I drive around town I see plenty of cheaper Chinese branded vehicles and loads of motorised wheelbarrows.... I mean very small town cars as well.......counting vehicles sales is rather outdated!! It a wee bit like counting pedestrians and then coming up with a conclusion that they can't afford cars!!

Now lets knuckle down to WMP and Fonterra's hedging issue...that hedging is a little bit of a problem at the moment........ Too dismiss the current hedging contracts and how that will affect farm gate prices is well to look at things with rose tinted glasses.....It is like sitting under a coconut tree going this is the life positively brimming with enthusiasm only to be hit in the nether regions by a falling coconut.......would you remain positive while gasping for air thinking the cup is full.......no you'd bang some ice on and reduce the swelling to take you back to where you started.

Whether you accept it or not SME are the biggest tax payers and they generate all that feeds up not the other way around like you and people in your types of positions would like the general populace to think......so let us all dismiss OCR's and other interest/bond rates etc for a moment as these settings all rely on the feed up.....now SME's are getting swamped by red-tape, compliance etc and overhead creep is at a gallop thanks to stupid policies implemented by the idiots in Parliament and bureaucrats who have found more and more ways to have a double dip and sometimes a triple dip at private enterprise.

An example would be ACC held up as the compulsory no fault accident insurer (1 dip) followed by criminal prosecution if the employer was found negligent.(2nd dip) followed by Work site safety - everyone on site can get fined, closed down site and further prosecutions (3rd dip) ......do you get my drift?

Another example would be the building industry.....I must obtain the services of an LBP to build a home (1 dip) I must then use a Council and make sure that my home is compliant with their interpretation of the rules (2 dip) I must also either use products that are approved by another Government organisation or pay.obtain product specifications BRANZ approved or other (3rd dip)

Each time anyone of us buys something we are paying a portion of compliance, red-tape and every other overhead cost that is added to a product and or service and all these costs have escalated significantly over the last 20 years or so.

And a different type of example would be the Government drops the price of vehicle registrations (licensing) but increases the cost of RUC.....so the average working single and double cab diesel ute just got a $200 increase in RUC per 10,000km
All those working vehicles pay ACC on the rego....and the business that owns the vehicles also pays ACC on business income.........

It is a complete waste of time looking at traditional markers that provide a distorted picture of an economy........

New markers such as the percentage of income that SME's have that is unencumbered by overheads and compliance costs.
Another would be total working days per annum required to meet Government spending and debt obligations per annum.

Roger are you trolling? for 7 years now you regurgitate the same thing, "recovery is coming/here/happened and inflation will be here any day now, promise"

are you a stuck clock that DC rolls out every 2 months?

You only know that because you've been here 7 years regurgitating ..."energy crisis is coming/here/happened and depression pt 2 will be here any day now, promise"!

If I want to make financial decisions I always read your views/predictions/analysis.............and then assume the opposite. My assumptions are always right.