By Roger J Kerr
When I was a kid playing rugby, our coach (often my father!) would drum into us the importance of the “three P’s” to win any footie match i.e. Possession, Position and Pace.
I am sure the Super Rugby teams of today are still reminded of these fundamental principles.
For the NZ economy the old and new maxims for what determines our good or poor fortune could be categorised as the “three C’s” – Climate, Currency and China.
All three variables play a crucial role in the performance of our economy and related price inflation /interest rate outcomes.
The RBNZ and every economic forecaster have been reminded over recent weeks that in NZ the climatic conditions often play a pivotal role in term of primary production/supply, agricultural prices and thus the overall economy.
Soaring food prices in January and February due to unseasonal weather and poor growing conditions caused the CPI inflation increase for the March quarter to be more than three times the RBNZ official forecast of +0.30%.
The RBNZ have already stated that they see these price increases as one-off’s that will not re-occur.
What if they are wrong in this assumption?
The anecdotal evidence I observe throughout New Zealand is that fields are saturated with water and vegetable growers for instance cannot get winter crops like cabbage, cauliflower, asparagus and Brussels sprout planted.
Grain prices are up as Canterbury cereal farmers could not harvest their crops due to the rain.
Foods prices will stay up for many months to come as supply volumes are down.
The combined abacus at the RBNZ might be whirring a little faster to factor in the influence of weather on the NZ economy and inflation at this time.
Tradable inflation is back in positive territory in the March quarter CPI figures released last week.
We may have finally seen the impact of the lower currency value on imported goods prices as previous price decreases drop out of the annual numbers.
Add in rampant increases in construction costs and the possibility of wage increases finally lifting and the inflation picture is a lot different going forward compared to the benign conditions over recent years.
Net result is the increasing likelihood that the RBNZ will be forced by the economic data later in the year to bring forward their first OCR interest rate increase to early/mid 2018.
International investment follows international trade and we are witnessing considerable inwards Chinese investment into New Zealand over recent years.
I am not just talking about Chinese individuals buying houses in Auckland as a safe haven for their money out of China, however the more significant Chinese part-ownership of primary product processors such as Synlait and Silver Fern Farms.
Also witness the wild volatility in whole milk powder prices (thus milksolids payout to dairy farmers) due to the large export volumes going into China with their haphazard and nonsensical import buying behaviour.
The China influence and impact is not going away, it is only going to increase, therefore we have to live with the volatility and manage our own price risks.
No-one is seeing interest rates staying low now. The only question is when and by how much they increase?
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Roger J Kerr contracts to PwC in the treasury advisory area. 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
Firstly, the experts and the Banks are continually wrong with their predictions.
They get no benefit from being correct as they make money whether rates are low or higher!
Several years ago they were tipping rates to be 9 per cent and of course they dropped as low as 4 per cent.
I beleive from previous experiences of economists tips you can normally do,the opposite and do much better.
The U.S. Can not afford to have high interest rates as it will blow their country further into the mire.
The rates may go up a small amount but I would be extremely surprised if we will see 6 per cent again for one year fixed.
If we do, NZ will be booming and inflation very high!! !!!
Look up Steve Keen one of the few who predicted the GFC, not one of the many above you mention.
The banks and "experts" want it to rise because a) being parasites that's how they make money, b) its a sign the economy is doing well, except in main street it is not. So sure the parasites and others are making $s still, joe mainstreet however isnt and that's just it the bad stuff is being ignored because it doesnt suit their outlook.
The thing is in the short term you can make interest rates rise simply by putting them up if you want. The thing is then the real economy underneath supporting that suffers and contracts forcing a reversal.
look around - there is no signs of any of the major economies taking off - oil is static and production through shale and fracking is picking up again - then the BRICs who were supposed to be the new developing powerhouses - well brazil and Russia are both down the pan - technology improvements are reducing production costs in many goods industries - which only leaves wages and housing costs as inflation drivers - food comes and goes - next year it will be a - contributor so not underlying increases -
I think the recent equal pay settlement could be a major driver - as there are at least 10 times as many workers in line for increases - all of which will add to government spending / taxes price increases in businesses reliant on cheap labour -
but outside of that - and housing - hard to see a viable driver of serious increases in rates
keywest,
By whom is it said? Sure,it sounds good,but it not that straightforward. Everybody knows that tomato growers use enhanced levels of CO2 to promote growth,but that is in an artificially controlled environment. Out in the open,a rising temperature brings more extreme weather conditions-more intense rain and drought-and the potential for different pathogens to survive and thrive.
I think there will be some short-term gains in some places,but overall,the effects are likely to be negative.
Also every degree warmer the air gets, it's capacity to hold water increases 8%. Lost productivity from storm and flooding could be very real.
Niwa have some good infomation here:
https://www.niwa.co.nz/our-science/climate/information-and-resources/cl…
The problem with your never ending prediction of forthcoming significant inflation is there is a NET effect you ignore.
Lets see if I can make it really, really simple for you with a model.
if I have $100 in my wallet and food costs me $70, mortgage is $10 then I have $20 is spent somewhere else. If we now see food costing (say) $75 then there is only $15 to spend somewhere else so the seller/vendor/shop somewhere else has a choice, sell at $15 or not sell. The NET effect on CPI / inflation is zero which is how it has been since 2008's GFC.
Lets make it worse, the RB puts up the OCR and my mortgage is now $12. The "somewhere" else shop now has to sell at $13 to stay in the game, it is a double whammy for one sector of the economy, the tradables sector. It sees deflation and repeatedly and at some point just as they start to recover a bit, instead they will just fold over and the RB will have caused a second GFC, I just hope they are not that stupid.
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