By Roger J Kerr
How the New Zealand economy performs in terms of GDP growth over the next 12 months will determine inflations risks and that in turn determines monetary policy settings - that is, the level of short term interest rates.
Right now with the NZD/USD exchange rate above 0.8000, 2012 GDP growth forecasts have to be nearer +1% than the previous +4.5% forecasts.
As the RBNZ economists contemplate the massive changes in the global economic and financial market landscape and conditions since their June monetary policy statement, you can bet the September MPS (to be released 15 September) will be a lot different in tone and outlook than the positive June statement.
Even though business/consumer confidence and other domestic economic indicators have not changed much over the past two months, there have been significant changes in the engine room of the NZ economy, the export sector.
Exchange rate volatility and sharp downturns in some export commodity prices have fundamentally slashed the positive growth outlook of just a few short weeks ago to something today that is much more uncertain.
Revisions down in global growth forecasts will be a feature of the RBNZ MPS analysis and will support their decision to leave OCR increases on hold until at least December.
The previous rosy export outlook now has severe risks around it if the NZ dollar does not depreciate over coming months. Local economic commentators do not appear to have understood the significance of the recent falls in wholemilk powder and forestry prices.
The commodity boom the NZ economy has been enjoying may have run its course and a revision downwards in Fonterra’s $7.25/kg milksolids payout at some stage over coming weeks has to be on the cards.
A lower dairy industry payout number would certainly have negative connotations for the economy as a whole.
At the start of the year the RBNZ released a research paper confidently predicting that our high agricultural export commodity prices were here to stay for the long term. Current price trends downwards are now seriously threatening that underlying economic assumption.
Up until three months ago the commodity price increases were matching the NZD appreciation. The events since have seen commodity prices fall and the NZD spiral upwards to 30-year highs of 0.8840.
The economic equation has shifted and only a currency fall unrelated to commodity price decreases looks likely to prevent the economy from pathetic growth rates next year.
The inflation risks have reduced as a consequence, so the RBNZ will be justified in delivering a much more dovish statement come 15 September. Interest rates are lower for longer unless the currency value decreases to the low 0.7000’s.
Dairy prices
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* Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. This column was written before the Monday quake. More commentary and useful information on fixed interest investing can be found at rogeradvice.com
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