Roger J Kerr likes what he sees in an improving economy, but he worries about a 'nightmare scenario' of a dry summer and a high currency. Your view?

 By Roger J Kerr

Was the abrupt slowdown in retail sales, jobs and GDP growth over the September quarter a mere pot-hole in the road for our economy, or something more permanent?

Coming off the extraordinary expansion due to booming agricultural production in the first two quarters, a slowing up in the September quarter is only natural and expected.

The weaker retail and jobs data already released points to a GDP result on December 20 of between 0% and +0.2% for the quarter.

There was some bad news last week for the doomsayers forecasting a large and permanent pot-hole for the economy.

The ANZ National Bank monthly survey of business confidence was up strongly across the board on all measures.

A cynic would suggest that the increased optimism amongst business folk was more about their own share portfolios and residential property assets going up in value. However, there is no question that the strong NZ sharemarket and NZD foreign exchange markets continue to price in a very positive outlook for general economic conditions.

The current squeeze in the Auckland housing market that is pushing up prices is all about the under-supply of new houses in the 2009 to 2011 period and the lack of new land being available for residential sub-division.

Market dynamics being what they are, property developers in Auckland today are now getting the backing of bank financiers as the underlying demand is strong.

Therefore, over the next 12 months supply will gradually catch up with the demand and the current heat in the market will dissipate.

Low mortgage interest rates are also playing their part in the construction sector being more optimistic about the future. Low mortgage interest rates and rising equity values in houses also helps consumer spending.

Therefore, perhaps the increase in business confidence at this time is not such a surprise. Governor Wheeler’s commentary accompanying the “no change” decision with the OCR on Thursday will canvas the aforementioned trends in the economy.

One scenario the RBNZ will be quite conscious of is the NZD being pulled down by a weaker AUD over coming months and this in turn causing the current tradable deflation morphing into tradable inflation, alongside the always high non-tradable inflation.

One clear risk to the still positive economic outlook is the possibility of a dry summer for our farmers and agriculture production being significantly down on last year.

The RBNZ would have to seriously contemplate interest rate cuts if the nightmare scenario of a summer drought and continued high NZD/USD exchange rate above 0.8000 does actually eventuate.


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Roger J Kerr is a partner at PwC. 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

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I believe you are totally wrong Roger, there has been an obvious disconnect between what people say and what they do as evidenced by past improvements in confidence reported in surveys not borne out by subsequent actions and the reduced tax take as measured against Treasury forecasts indicates either falling and less profitable economic activity or an incompetent treasury which I much doubt.

There was some bad news last week for the doomsayers forecasting a large and permanent pot-hole for the economy.
There is a never ending great cavern that NZ labour has fallen into - the only exit is residence in a another country with a more welcoming environment.
NZ based capitalists should have stored many years of reserves if the relative figures in these two graphs here and here are a true representation of modern slavery down under.
Graphs courtesy ZH

One big pothole is the rumoured shortfall in beef ready for slaughter. I do believe the figures for spring were down substantially.
At least Roger you eaconomists are at last figuring in the weather. I remember back in 2008, every thing was hunky dory despite a huge swathe of NZ being decidedly brown in colour. The penny didnt drop till the money didnt arrive from overseas.

Must be a rate cut coming, if Roger is now calling for one...
Given he is normally calling for increases to interest rates..
Things must be really bad.

The RBNZ would have to seriously contemplate interest rate cuts if the nightmare scenario of a summer drought and continued high NZD/USD exchange rate above 0.8000 does actually eventuate.
In respect of my emphasis: -would the US fiscal cliff dictate another scenario?
But MortgageBelt you raise a good point about Roger Kerr's past interest rate forecasts.
I believe it is incumbent upon David Chaston to seek a published disclosure statement of interest in Kerr's current and most recent past professional client recommendations - at least then we can all be clear on his independence of thought.
Upon listening to the Radio NZ report about Interest rate swaps sold to farmers back in and around 2007, I noted a similar lack of talk about bank disclaimers in respect of bank debt positionng when bank salesmen were engaged in swap sales.
The banks, in publicly available disclosures, were shown to be exposed to fixed rate term liabilities in the form of Eurokwiwi and Uridashi notes. They would naturally wish to pass this liability on to anyone but themselves as the costs would be crippling if interest rates fell - as indeed they did.

Housing starts doth not an economy make.

NZ is tied to Australia and Australia is tied to China. With the RBA likely to chop rates tomorrow in the face of largely negative numbers coming at it from all sides, it's hard to see why business confidence in NZ should be up.

There'll be more rate cuts coming on both sides of the Tasman in the new year.

I find it hard to believe that this guy is a partner at PWC. Or maybe I don't. After alll look at all the supposed "expert opinion" coming from the so-called authoritative bank economists, so much of it so wrong.
There are three fatal flaws in his analysis.
1. He places too much weight on confidence surveys. Even one of the bank economists, can't remember who, maybe Tony A, recently said in this volatile economy they are of limited value as predictors.
2. He is wrong on a strong housing rebound. No doubt more confidence in the market will lead to an improvement in housing construction, but it will be modest as restrictive planning controls and excessive construction and regulatory costs impose big restrictions.
3. He fails to take into account the growing momentum in the Aus slowdown, and its inevitable impact on NZ.