Opinion: No growth until the exchange rate falls

By Roger J Kerr Recent employment, housing and retail economic statistics have all been universally weaker than expected or forecast. Term swap interest rates have moved downwards in response and market pricing/economist predictions for the timing of OCR increases this year have firmly moved back to July/August. The wider financial community is now realising the hurt being felt in average household budgets as job security deteriorates and big ticket purchases are put on hold. The property market breathed some relief last week that land taxes and capital gains taxes seem to be off the Government's agenda, however expect property depreciation changes and rental investment property ring-fencing for tax purposes. The RBNZ can relax about any housing-fuelled consumer spending threatening the benign inflation outlook in 2010. These worries were exaggerated in the first place. The speed, strength and durability of the economic recovery in 2010 still depends heavily on the export sector (and the commodity prices and exchange rates they transact at). Like any winning Super 14 rugby team the forward pack engine-room will determine success or failure. So it also goes with the NZ economy, with the export engine-room vital to growth. The RBNZ's GDP growth forecast for 2010 is heavily dependent upon stock rebuilding and 10% growth business investment. I repeat my earlier prediction that neither is going to happen and as the year progresses the RBNZ economic gurus will see this as well. Economic growth will continue to disappoint over the first six months of 2010, the timing of interest rate increases will continue to be pushed back until the currency depreciates and the export sector starts to drive higher GDP growth. On the proviso that the NZ dollar does decline further to 0.6500 and below (which I expect), from August/September onwards until early 2011 90-day and 2/3 year swap interest rates will be increasing rapidly up to near the current 4 and 5 year swaps rates (the yield curve flattening, but still positively sloping). "”"”"”"”"”- * 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