This week we have learnt that in line with our own warnings and the feelings of many people out there the recovery in the New Zealand economy is proving to be a very lacklustre affair which is leaving many people scratching their heads wondering if this is as good as it gets. 

First we have the results of our monthly confidence survey released on Monday night. They show that only a net 2% of respondents feel the economy will get better over the coming year. This was down from the June result of a net 26% positive and well off September’s fairly ridiculous level of +56%. Importantly when looking through the many comments submitted by respondents we find over-whelmingly negative comments including from two groups who have traditionally said that things are generally not too evil – the legal and accounting professions.

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• Tony Alexander Comments
• If I Were a Borrower What Would I Do?
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Our interpretation of the survey results is that businesses across many sectors feel the recovery is not as good as they had been expecting or hoping. However at the same time we can see labour demand picking up in many places and one suspects that in those industries where things are going well people are keeping quiet – perhaps as one emailer this week suggested trying to send a signal to the Reserve Bank that it would be good to keep interest rates low for longer. Secondly we could see weakness in the housing market continuing in the monthly report from REINZ. Dwelling sales in June were the second lowest in the month since our records started in 1988. On average properties were sitting on the market a tad longer in the month as well.

But consistent with our long running view there is still minimal downward pressure on prices with the average sales price actually up 0.6% in the month. There is zero evidence of investors offloading properties,but the level of uncertainty out there says to us that the housing market is going to remain very subdued in turnover terms for quite a while longer before the growing awareness of inadequate construction of new dwellings (plus rising construction costs) pushes prices back upward again next year.

Thirdly we had yesterday’s retail sales numbers for May. Core retail spending in seasonally adjusted terms fell 0.2% which was much worse than the rise over 0.5% expected by forecasters. The decline followed a fall of 0.1% in April and shows that over the three months to May core retail spending grew at an annualised rate of just 2.3% after falling 6% three months earlier.

The best one can say we think is that there is no growth in retail spending and this would seem to gel with the fairly negative comments submitted by retailers in our survey. All up the data received continue to show an economy struggling to find its legs this recovery and we put a lot of this down to simple nervousness about what is happening around the world, cost pressures on families, plus maybe – just maybe – a many decades-long overdue change in Kiwi household behaviour away from borrowing to saving.  Actually we will believe there has been a change in our dissaving behaviour only if things stay roughly this way for the next five years. It is still possible the debt demand adjustment is just a temporary thing and as the labour market improves people will borrow a lot more again. We shall see.

Do the data this week mean the Reserve Bank should stop raising interest rates? No. people must remember that they are taking the official cash rate away from a 2.5% level put in place as New Zealand’s contribution to a global fight against a Depression scenario which disappeared off the forecast boards last year. In addition the RB has a good opportunity to promote a structural lift in household savings by raising the cost to us of borrowing before we even think about getting more of someone else’s money from the bank. Thirdly they are right to have a good look at inflation two years from now when the lack of business capital spending will have produced some potentially severe low productivity levels and therefore extra cost increases. And finally there is a need to get interest rates up just in case the world economy does tumble back down again and it is this factor which strongly occupies the minds of central banks overseas.

They want to raise their rates to create buffers in case a new bad scenario comes along and they can then cut them again. They know that if such a scenario occurs before they have raised rates then they could end up stuck with as ineffective a monetary policy as Japan has been stuck with for a couple of decades now. Add to that the inability of governments to use fiscal policy again if the stuff hits the fan and one conclude that in many ways the world economy is now more vulnerable to a shock scenario than was the case 2 – 3 years ago.


If I Were a Borrower What Would I Do?
We wrote untold here last week and have nothing new to offer this week. The RB would have to pause in their tightening cycle for a year to make one worse off fixing two or three years than floating at the moment. So I’d veer marginally toward fixing (probably three years) but most people won’t. That is because fixing at the moment involves locking in a rate well above current floating rates, and many people don’t believe the RB will keep raising rates in light of weak data. Also maybe one can hold off a few weeks staying on the low floating rate hoping to jump into a fixed rate just before it rises. Good luck because we don’t really know how long the round of fixed rate cuts last week will be sustained. Watch the rising swap rates.


If I Were a Term Deposit Investor What Would I Do?
Keep an eye out for some attractive short term specials. I would be inclined to put some funds out long term but personally am keeping the bulk short looking to ride the short end of the curve upward and hoping for better long term rates further out. Hoping.


Exchange Rates & Foreign Economies
NZD At US 72 cents - The Kiwi dollar has risen this week to sit this afternoon near US 72.0 cents from 70.3 cents last week. This is the highest exchange rate since a brief surge in early May and before that mid-January. Gains on the crosses have also been registered with a rise to 63.4 yen from 62.1, 47.2 pence from 46.3, 56.5 centimes (Euro) from 55.6, and 81.8 against the Aussie dollar from 80.6.

The rise has come in spite of the weak data discussed above and seems to more reflect a fairly strong round of short-covering than anything truly substantive. In addition however there was a small amount of support from a slight improvement in global risk sentiment this week as seen in the likes of the Dow Jones Index gaining 3.5% from a week ago, the Nikkei 5.5% in spite of worries about a newly unstable government following last week’s elections, a 4.7% rise in the Footsie 100 in spite of Moody’s warning about the UK credit rating, and a 4.9% rise in the ASX200.

At least in Australia during the week some of the data releases were acceptable including business sentiment and subsidiary indicators holding up in the latest NAB survey, plus of course last week’s stellar(yet again) monthly jobs market report. (Go west young person is clearly the message here.)

Previous Economic Comment
BNZ Weekly Overview 8 July 2010  >>
BNZ Weekly Overview 1st July 2010 >>
BNZ Weekly Overview 25th June 2010 >>
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 >>