By Roger J Kerr
Whether you believe that the moneymarkets and/or the RBNZ will be forced to alter their current view on the timing of OCR increases this year comes down to how well the economy performs in the first half of 2011.
Current media and economist commentary on the economy remains pretty gloomy, focusing on static retail and housing sectors over the second half of 2010 as the key drivers of the economy in 2011.
It is of course very easy to look back at the flat 2010 economy and conclude that nothing is happening any different this year to change that benign outlook.
Such a conclusion runs the risk of being horribly inaccurate in my view.
On the assumption that the NZD/USD exchange rate comes back to the 0.7000 area to help the profitability/investment of the big primary industry exporters, the economy is poised for much more robust growth this year.
The September 2010 quarter GDP was negative because dairy and meat production was down due to climatic factors.
Both could easily bounce back upwards in the December quarter.
Manufacturing definitely improved in the December quarter and recent retail/employment data does not suggest we are not in for another shock negative GDP number when the December quarter figures come out in late March.
I see the mood steadily improving over coming months as the 2011 data prints stronger.
With the improved sentiment will come rising one to three year swap rates as the interest rate market starts to realise that 3.00% annual GDP growth does bring with it inflation risks.
If the RBNZ are managing monetary policy on a 12-18 months forward look basis (as they must be) they will not be able to hold the current complacent approach too far into the year.
The double-dip recession advocates are completely ignoring the main driver of the economy – agricultural commodity prices, which are at 30-year highs.
Here’s why I see the 2011 economic data improving:-
- Another milksolids payout lift from Fonterra will encourage some spending in the provinces as the debt reduction phase runs down.
- Increasing dairy farm land values have now repaired farm balance sheets and the bankers will be calling off their hounds if they want to maintain/grow their lending levels in 2011.
- Rural confidence surveys are up with the fantastic prices and more certainty around winter feed stocks and grass growth (thanks to the summer rain).
- Business and consumer confidence surveys displaying positive sentiment cannot be wrong two years in a row!
- Job security and thus household spending decisions will lift with the more upbeat economic numbers coming through.
- Outside the RWC and Canterbury earthquake rebuild, the forward bookings for tourism look much stronger this year.
- New business investment is starting to increase with business/commercial credit from the banks increasing in December for the first time in nearly three years.
- The residential property market is no longer a lead indicator for the economy, thus irrelevant to any discussion on what will be driving the economy in 2011.
* 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