Opinion: RBNZ wrong on growth, OCR to fall further?
16th Dec 08, 9:35am
By BNZ Markets Economist Mark Walton There's no sign yet of the world economy reaching any sort of trough. On a global scale, activity indicators are declining, household spending is struggling, unemployment rates are lifting and trade growth is coming to a standstill. Even as we think things couldn't get any worse, each new data release seems to confirm a further deterioration. This continued slide in global economic growth has seen forecasters around the world rush to downgrade their expectations. Over the past four months, expectations of global economic growth, as compiled by the London-based outfit, Consensus Economics, have plunged. Back in September, year-ahead global growth was expected to be around 2.5%. It's now down to 0.4%. Further downgrades would not surprise. Expectations of New Zealand trading partner growth are barely any better. Consensus forecasts see our trading partner economies growing just 0.6% in 2009 (on a trade-weighted basis). Again, this is a massive downgrade in expectations. Just three months ago the consensus view was that 2009 trading partner growth would be 2.6%. Indicative of just how awful these figures are, the trough in trading partner growth of 0.3% on an annual average basis, is a full 1.0% lower than the 1982-84 recession when New Zealand growth troughed at -1.3%. At the moment, we don't expect growth here to slow quite that much. We believe the massive stimulus underway via tax cuts, monetary policy easing, the falling NZD and lower petrol prices, will see the New Zealand economy stage a recovery in the latter stages of next year. However, we acknowledge that worsening expectations for global growth pose further downside risks to our forecasts for the year ahead. Though we already expect export volumes to decline during 2009 (which together with falling business investment will act as a major drag on GDP growth), there's the very real prospect that our forecasts aren't sufficiently weak given the global slowdown. Just as importantly, the 0.6% trading partner growth expected during 2009 is already considerably worse than the Reserve Bank anticipated in its December Monetary Policy Statement, in which it assumed that the global economy would trough in the first half of 2009 and that our trading partners would expand by 1.1%. Furthermore, much of that view is dependent on relatively strong showings from Australia and non-Japan Asia. But the Asian economies have been amongst those that have seen some of the sharpest downgrades in their growth outlooks, as the impact of the global recession on emerging economies becomes more apparent. So while the slumping international outlook poses downside risks to our forecasts, such is even more the case for those of the Reserve Bank. As of the December MPS, the assumed (and already overly-optimistic) trading partner growth outlook underpinned a track in the OCR down to around 4.5% by the end of 2009. All other things being equal, the downward shift in international growth expectations suggests the Bank will be required to ease by considerably more than the latest MPS indicated. On top of that, it's quite possible the local economy's starting point is weaker than the Bank judges to be the case. After incorporating the various partial GDP indicators that surfaced over the past couple of weeks "“ the most recent being Monday's Q3 manufacturing figures "“ we've finalised our September quarter GDP pick at -0.5%. The RBNZ, by contrast, expects -0.2%. That's not a huge difference, admittedly. Nonetheless, it's one more instance in which the Reserve Bank looks likely to be disappointed on the downside. We suspect that these disappointments will accumulate over coming months, with further aggressive monetary policy easing the result. As for Monday's manufacturing data, the 2.3% decline in total sales volumes turned out to be more or less what we expected. After making our usual adjustments for agricultural processing "“ which we expect received a post-drought boost, via dairy "“ the result aligned with our view that manufacturing GDP dropped by 1.0% during the September quarter. In turn, this was enough to nudge our Q3 GDP forecast to -0.5%. The official word is due from Statistics New Zealand next Tuesday. Ahead of that, this week's data will provide timely updates on sentiment, of both the household and business varieties. Wednesday's Westpac-McDermott Miller confidence survey could well hold the relatively robust level of 104.9 seen in its previous, September, edition. Interim monthly confidence readings dropped before lifting again more recently, to remain largely unchanged on three months earlier. The massive amount of economic stimulus in train, much of it of a direct benefit to households, is certainly suggestive of households hanging in there amidst the wider gloom. The big risk to households' happiness, and thus their propensity to support retail sales, is the outlook for the labour market. And on that front, Thursday's National Bank's Business Outlook survey will provide an update on firms' intentions regarding their respective workforces. Employment (and investment) intentions have already fallen substantially in recent months but are set, we expect, to remain at low levels. Indeed, it's difficult to believe that any of December's key Business Outlook indicators will be anything other than as bad as those seen in the October and November surveys. As well as being indicative of further firm rationalisation, we suspect the activity outlook will remain weak, and hence consistent with a further contraction in the economy during the first quarter of 2009. Pricing intentions, too, will likely resume their downward slide. That the fortunes of the New Zealand economy are intimately related to those of the rest of the world will likely be further highlighted in Friday's migration figures. In particular, we suspect November's tourist flows will look horrid, following on from October's 3% y/y decline. Indeed, the tumble in inbound visitor numbers is entirely symptomatic of the parlous state of the global economy, which we believe is casting a much darker shadow than many currently acknowledge. * All of the research produced by the BNZ Markets team of economists is available here.