By Roger J Kerr
An analysis of who picked the strong +1.6% expansion in the economy over the first six months of 2012 is a bit like my golf game – some pretty good and some very bad.
Or to put it another way in terms of a football score result, “The Markets” 2 v “The Economists” 0.
Both the March and June quarters’ growth results were substantially above prior consensus forecasts from the local fraternity of economists.
The rise in the NZ share market and the rise of the NZ dollar currency value this year have been consistently telling us for some months that the NZ economy is performing rather well.
In contrast, the consistent message from the economists has been that our economy was static, struggling, stuttering and stumbling. It still surprises me that the economists completely ignore what the markets are telling them.
The +0.6% increase in the June quarter, on top of the 1.0% expansion in the March quarter, has confirmed just how out of touch and wrong the pessimistic or flat outlook was.
A possible explanation is that the economists spend far too much time watching CNBC with its daily menu of debt and economic woes in Europe and perhaps not enough time talking to farmers in the heartland of the Waikato, Taranaki and Southland to get a handle on what is really going on in the NZ economy.
As expected, Europe’s problems have not dented our economic performance at all, households in NZ are spending again and are no longer constrained by deleveraging and the Christchurch rebuild is certainly well underway.
The positive and encouraging aspect of the June quarter’s GDP numbers was that the expansion in activity was not just agriculture production and construction; most other sectors were up as well.
We may have had some luck with the brilliant climatic condition for growing things; however like a round of golf, you take the lucky shot and let it boost your scorecard.
The implications of the strong GDP growth result on the future outlook for interest rates are that inflationary pressures are elevated, not reduced.
However, the most significant determinant of inflation levels going forward will be the exchange rate.
If the NZD stays above 0.8000 against the USD for a prolonged period over coming months, imported goods reduce in price and the economy looses momentum as exporters struggle. In this scenario interest rates cannot move up for 12 months.
Alternatively, if the NZD tanks to 0.7500 on the back of an RBA interest rate cut, the economy has better growth prospects and inflation increases as tradeable goods no longer reduce in price.
The outlook for short-term interest rates remains 100% dependent on NZD/USD exchange rate movements.
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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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