By Roger J Kerr
The future NZ economic conditions, forces and environment continue to unfold in a fashion that appears almost completely opposite to what the RBNZ portrayed in their June monetary policy statement just a few short weeks ago.
The first job Dr Graeme Wheeler might want to do as the new RBNZ Governor in September is a critical review of their economic commentary and forecasting performance record.
Consider the following key components of the NZ economy:
Commodity prices
The RBNZ were forecasting global and NZ specific commodity prices to continue to decline over the course of 2012, thus reducing inflation rates and also negative for our GDP growth.
Those heroic commodity assumptions/forecasts look under threat already.
Wholemilk powder prices have since rebounded upwards and now global energy and hard commodity prices have bounced up from the May/June declines, following the German cave-in at last weeks EU summit and the markets back into the “risk-on” mode.
Housing market
As expected, the lack of supply of new and existing houses coming on to the market (particularly in Auckland), coupled with historically low mortgage interest rates, is starting to drive up real estate prices and expectations.
Construction costs and rents are only going one way and the RBNZ have been far too complacent on this property market situation and the knock-on impact on inflation.
GDP growth
The March quarter’s 1.1% expansion was no one-off, fluke solely due to inventory increases as some are suggesting.
The strong growth proved that our economy is largely immune to the economic woes of Europe. Business investment was up and thus the outlook for the principal drivers of the economy is positive i.e. primary production, manufacturing and the construction industry.
An annual growth rate for 2012 of 3.00% now looks more assured. The RBNZ’s econometric model needs a recalibration and re-bore.
Credit growth
The RBNZ have stated over recent years that they will not have any concern about future inflationary pressures until credit growth rates are positive and accelerating.
Official measured annual credit growth is starting to rise and anecdotal evidence we observe from aggressive bank lending to corporates and a dramatic jump in overall credit enquiries to credit agencies over recent weeks suggests we will see some real credit expansion over coming months.
Australian interest rate market
The Aussie moneymarkets are now pricing in 80 points of cuts over the next 12 months, down from 150 points a few weeks ago. The construction industry in Australia is now in its worst slump in 20 years; however their new Carbon Tax looks set to increase inflation and send the Gillard Government down the road.
The conclusion is that the RBNZ’s September Monetary Policy Statement will have quite a different tone to their hesitant and uncertain June overview; thus the interest rate market will eventually start to price OCR increases, not decreases.
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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
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