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
Select chart tabs
--------------------
* 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
7 Comments
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. Where was the 'certainty' comming from?
You can't make descisions for the long term based on short term analysis. The fundamentals don't look good, for the long term, debt is a burden over the global economy. The 'solutions' havn't worked, and were never going to. When you can't pay your debts only an idiot would think that borrowing more would fix all your problems.
A few important countries in the global economy are in debt spirals, it ends with default eventually.
I wouldn't count on high 'real' commodity prices for the future, who can afford to buy at high prices, even in NZ milk is 'too expensive'.
"... only a currency fall unrelated to commodity price decreases looks likely to prevent the economy from pathetic growth rates next year"
I wonder whether Kerr has decided the headlines are worth more than the detail...for those Kerrites out there forehead to the dirt, he left out the bit that said a currency fall will bring import inflation that you peasant will cop in the face. All well and good for the manufacturing exporter to roll in the Kiwidosh when the Kiwi$ is worth just 40us cents...in fact they could probably light their fires with banknotes...but when you have to fill your tank to be able to get to what work there is...hard bloody luck...petrol at $5 a litre...Kerr reckons that would be great for the country.........go figure!
But he inserts his insurance comment..."unrelated to commodity price decreases".....as though it saves him...it doesn't....if anything it makes his statement worse...because the Kiwifx rate is directly related to commodity prices....joined at the hip...fused together!
It's finally dawning on people that the problems of the western economies have not been fixed... rather they have just delayed having to deal with it, hoping it would go away. NZ has a large private sector debt overhand and this will act as a drag on growth for years to come, reducing government tax intakes at the same time and making it harder for the NZ govt to get back into surplus.
Roger Kerr makes some very valid points here. Bank economists have been way too optimistic, as have the NZ govt, about growth. NZ commodity prices are highly linked to our Fx rate so I can't really see the NZ dollar dropping massively without commodity prices dropping too. It's years of austerity to come to pay for the excesses of the naughties!
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.