'If the NZD does not depreciate the NZ economy is really going to struggle to record any positive growth' says Roger J Kerr

'If the NZD does not depreciate the NZ economy is really going to struggle to record any positive growth' says Roger J Kerr

By Roger J Kerr

All eyes are this week on the RBNZ’s updated outlook for the NZ economy due out in the monetary policy statement on Thursday.

There have been some large and fundamental changes for that outlook since the last RBNZ MPS back in June.

They were more upbeat on the economic outlook than what the market expected in June, this time I expect them to be more downbeats than what the markets/economists anticipate.

Global growth is lower, our commodity prices and the NZD currency have alarmingly diverged and export industries are now really struggling (note losses, job lay-offs and closures in the wine and timber processing sectors).

The NZ economy requires a major currency re-alignment (NZD/USD rate into the low 0.7000’s) to achieve +4% 2012 GDP growth forecasts and the Government’s budget deficit forecasts.

If the NZD does not depreciate the NZ economy is really going to struggle to record any positive growth.

Whether the RBNZ economists are up to date on these latest market developments is a mute point. Readers will recall the very positive RBNZ view earlier this year on our food commodity export prices staying near to record high levels and this being a major contributor to strong economic growth over coming years. That picture has changed dramatically in recent months with export commodity prices like wholemilk powder falling 36% since their peak in March.

Much lower global interest rates (in US and Australia in particular) over recent months has lowered and delayed increases in NZ interest rates. Hence the local investor rush for corporate bond issues like Air New Zealand’s offering last week as the alternative of a 3.50% yield return from a bank deposit for a much longer period is unpalatable to most.

It appears the RBNZ have a lower threshold to remove the 0.50% OCR cut they made for Christchurch earthquake reasons in March than for other OCR increases based on future inflation/growth conditions. The market expects the earthquake 0.5% cut to be removed in December, however if the NZD currency value stays up the RBNZ may take it slower than that.

The RBNZ would be making a grave error in monetary policy management if they look back too much in the rear-vision mirror at stronger than expected domestic economic activity over the past 12months. The export sectors are the engine room of the NZ economy (always will be) and it does not take Einstein to work out that a NZD exchange rate value above 0.8000 is causing major problems to the economic growth outlook. Clouding the picture is the generally low NZD/AUD cross-rate which has allowed our manufacturing exporters into Australis to continue to do well. With consumer demand now weakening in Australia one wonders how long this positive aspect will last.

The RBNZ will also have to re-look at their forecasts of additional inflation coming out of the construction industry from the Christchurch rebuild. Resources are going to be stretched which leads to upward price pressures; however it is very evident that the rebuild will take years and will not be concentrated in 2012 as first thought.

Lower 2012 growth means lower inflation risks and I expect this RBNZ statement to reflect the changed situation.

Interest rate market forward pricing already reflects the reduced inflation risks.  Therefore, expect to see most of the financial market reaction to the MPS via the exchange rate and not too much change to the current interest rate yield curve after Thursday’s statement. 


* 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

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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.


Comment Filter

Highlight new comments in the last hr(s).

I think Roger has put all his money marbles in the foreign investments basket...a huge fall in the Kiwi$ would reward him massively.

What is the point of boosting farm incomes and export returns if the value of the $ crashes. The export company owners would make huge paper gains, as would those with investments overseas, but the rest would have to pay $5 a litre for petrol.

What we need is for Bollard to grow a pair and raise the ocr...to hell with the banks...make saving a national past time...slash inflation back to near zero%...


Bollard will sing from the song sheet his fellow bankers and political masters hand him, woo-betide if he steps out of line. The shinny suited bankers with both trotters and snout firmly planted in the trough are not going to budge for anyone. The only language they understand is a swift blow of a heavy hammer between the eyes. But who has got the gonads to do it?

NZ's economy is rooted, thats why I am Matt in Aus now. Anyone who believed the economists about the turnaround needed their heads read.

NZ is in the perfect storm. The strong NZ dollar is really hurting exporters, and as Kerr states this is being exacerbated by falling commodity prices. Yet an inflation issue remains - depreciate the NZ dollar and that issue is worsened, kiwis will spend less as petrol and other imported goods inflate, this would have its own negative consequences 

Aus is far from perfect economically but:

1) Its economy is not weighed down by a major natural disaster (the impact of the Q'Land floods is far less - on a nationwide basis  - than the Chch e'quake)

2) Its economy is slightly more diverse than NZ

3) Its much greater population leads to certain economic support - eg. if euro tourists stop visiting Q'Land, then at least Q'Land still has 20 million Aussies as possible customers 

4) It has more room to cut its OCR as stimulus

5) The mining boom is still going




6) Its leadership deficit is not so extreme

true (although the leadership here certainly has its moments)

and I would also argue that unlike NZ, Aus:

1. Was forward thinking in establishing super all those years back

2. Generally didn't introduce the same sort of daft regulation vis a vis leaky homes and the huge financial burden that is now placing on NZ, although obviously certain policies such as the first home buyers grant are flawed  

I enjoyed reading the bollocks served up in Wespac's latest weekly confused rant:


all over the place! why bother!

they talk about ramping up the OCR next year to combat inflation - but can the export sector withstand that?

I would answer "no"

again, perfect storm - damned if you do, damned if you don't  

What suits the RBNZ´s short term need will be the next meeting´s outcome...looks like keeping a low Kiwi is best as long as the RWC is on, once that is behind then they will focus on the Dec meeting and for RBNZ standards that is a world away...  for now it is all about keeping the KIWI low  against the AUD, main source of visitors to NZ in  these days.