Data released this morning show that the NZ economy grew by 0.6% over the March quarter (helping deliver the 22,000 jobs growth reported many weeks ago) following growth of 0.9% in the December quarter, 0.3% in the September quarter, and just 0.1% in the June quarter of last year.

The recession officially ended in the June quarter of last year (though this starting point for the recovery is being steadily revised away) but at just 0.5% average quarterly growth so far – or 0.6% excluding the June 2009 quarter – underlying growth has only been around 2% - 2.5% which is below average and a relatively mild upturn after GDP shrinkage of about 3% during the recession. 

The 0.6% March quarter growth came about from lowly 0.2% growth in private consumption from 0.8% in the December quarter and 0.9% in the September quarter. Government consumption grew by a strong 1.6%, residential construction 0.6% following 4.7% December quarter growth, and 1.4% export growth being outpaced however by 1.8% import growth.

Over the year to March the economy shrank by 0.4% but there was growth of 12% in forestry and logging, 7.7% in real estate and other business services, 2.3% in agriculture (in spite of the drought) and 3.8% in mining and quarrying. On an expenditure basis over the past year private consumption grew only 0.5%, government consumption 1.5%, while export growth of 2.8% swamped a fall in imports of 9.6%. Our expectation is that growth will accelerate to around 3% to 3.5% in the coming year meaning that we still expect a very mild recovery by historical standards.  Read More >>

Article Quick Links

• Interest Rates
• If I Were a Borrower What Would I Do?
• If I Were a Term Deposit Investor What Would I Do?
• Exchange Rates & Foreign Economies
• Previous Economic Comments

Interest Rates
A number of people have been wondering why OCR rises currently are leading to bank lending rates going up whereas when the OCR was falling bank lending rates did not fall as fast. They think maybe there is something fishy going on – but there isn’t.

Back between the middle of 2008 and April 2009 when the RB was slashing the cash rate from 8.25% to 2.5% (floating mortgage rates fell from 10.9% average to eventually 6%) the cost to us banks of borrowing funds offshore (the margin or spread) was rising because of the global financial crisis. That is, the crisis revolved around investors from managed funds etc. being less willing to lend to banks wherever they were hence they demanded a premium to in fact do such lending.

This time around while the OCR has started to rise there is not an opposite movement in that willingness of investors to lend. That is they are not rushing us with money because they think the planet financially speaking has become a wonderful place. In fact their willingness to invest with banks has deteriorated to some extent in recent months because of worries about Europe – and before that worries about Dubai. Read More >>
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If I Were a Borrower What Would I Do?
I am still happy to take the risk the Reserve Bank tightens less rapidly than we are currently forecasting so I would stay floating at a pinch – though it is almost a 50:50 call and nothing one can do will prevent one’s rate expense for the next three years being above current floating rates.  View Graphs Here >>
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If I Were a Term Deposit Investor What Would I Do?
As with borrowing I am happy to stay short taking a punt that sacrificing some short term return by not going long (five years) I will get some better short term and then long term rates further down the track. But with some pushing back of expected rate rises in foreign economies – which influence our long term borrowing costs – and my view that the RB here may not tighten quite as rapidly as we expect, one could do a lot worse than simply taking the five year 6.75% rate on offer compared with 4.9% for 180 days.  View Graphs Here >>
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Exchange Rates & Foreign Economies
The big news in FX markets for the week was the announcement over the weekend by the People’s Bank of China that they would reform the exchange rate management regime for the renmimbi and allow greater flexibility. Basically this means they will be prepared to see it rise and this is viewed as a positive thing in many regards. First it will help deliver a higher standard of living to Chinese people as imports become a tad cheaper – including overseas travel. Second it will help take some of the steam out of the Chinese economy and reduce the need (very marginally) for higher interest rates and lending controls in order to stem strong growth which is starting to produce worrying inflationary pressures not just in property but on a wider basis.

Third it takes some heat out of international politics where the Americans and others have long been lobbying the Chinese to allow their currency to appreciate in response to large current account surpluses.

Realistically however the changes in the price of the Chinese currency are likely to be relatively small and amount to only a few percent over the coming year. For NZ importers of Chinese goods a more important factor affecting prices is likely to be the increasing rate of gain in Chinese wages caused by rising industrial tensions “permitted” perhaps by a regime which knows people feel the time is right for a greater payoff for economic reform than just a job in a smelly factory. Higher incomes are being demanded and this is so positive for the likes of ourselves it is hard to overstate.  Read More >>
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Previous Economic Comments
BNZ Weekly Overview 18th June 2010 >>
BNZ Weekly Overview 3rd June 2010 >>
BNZ Weekly Overview 27th May 2010 >>
BNZ Weekly Overview 20th May 2010 >>
BNZ Weekly Overview 6th May 2010 >>