Roger J Kerr ends the year an optimist for the economy in 2012. Your view?

 By Roger J Kerr

Market consensus forecasts for GDP growth numbers to be released this Thursday are for a +0.8% increase in the September quarter over the June quarter.

Forecasts from economists on how the economy performed in the second half of 2011 have been very changeable over recent times.

Initially it was thought the Rugby World Cup only has a limited positive impact on the economy as locals spent all their money on tickets to attend the matches at the expense of other discretionary spending.

However, more recent statistics do confirm a reasonable boost in retail and accommodation spending through the September/October period.

Overseas visitor numbers were well above prior estimates, even if they did not spend the megabucks at all the new Auckland waterfront restaurants and bars that sprung up.

On top of the RWC affect, the fantastic growing season in the agriculture sector has increased production. I would not be surprised to see a GDP growth number slightly below +0.8% as manufacturing and construction industry sectors were very subdued.

I do not agree with other economic commentators that we are going into 2012 with a mood of a hangover from the RWC and that the economy will struggle to post reasonable growth.

What I observe is far more positive with export commodity prices still well above average, interest rates still at record lows and the exchange rate has come back from above 0.8000 to the mid 0.7000’s which keeps exporters profitable.

However more importantly for the economy, business investment can be expected to be much more robust as the cost of capital hurdle rates of return are just so much lower.

With the 10-year NZ Government bond risk-free interest rate now below 4.00%, any calculation of cost of capital is well below historical averages.

What that means is that for a new investment or business expansion to go ahead, the return on funds invested only has to beat a much lower cost of capital metric. More projects will get off the ground in such an environment.

Ahh, what about the European recession/debt crisis dragging the global economy down to stop such new investment decisions you may ask?

My view is that the local media/commentators have over-blown the impact of Europe on our economic performance.

Latest US economic figures are encouraging (not adversely affected by Europe’s problems) and China has plenty of capacity with both fiscal and monetary policy to prevent a major slowdown in their economy. The Communist leaders in Beijing know all too well that they cannot allow to growing middle classes to be become dissatisfied. They have the resources to maintain 8% GDP growth and thus demand for Australasian commodities will not fall away.

All it needs now for NZ GDP growth in excess of 3.00% next year is someone to sort out the insurance mess in Christchurch to get the housing rebuild underway. The more positive 2012 outlook suggests that the RBNZ will be seriously looking at monetary policy settings (the OCR) come mid 2012.

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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. More commentary and useful information on fixed interest investing can be found at rogeradvice.com