Opinion: NZ GDP to re-commence growth later this year

By Roger J Kerr The NZD/USD exchange rate has been pushed to the bottom-end of its 0.5000 to 0.5400 trading range by a weaker AUD and continuing prospects of lower interest rates in New Zealand. The three key drivers of the NZD exchange rate value in the short to medium term: "“ interest rate differentials to the USD "“ risk aversion levels through the US sharemarket direction, and; "“ commodity prices have all been pointing to a lower NZD, however there has not been any real evidence of keen sellers of NZD's in the marketplace to send the currency value lower. Off course the economic news everywhere continues to be dire, but that does not automatically mean that the NZD must move downwards as a result. Local bank economists continue to forecast the NZ economy contracting by 2.00% in 2009 directly as a result of the deterioration in the global economy over recent months. As a consequence they predict still lower interest rates (the OCR to 2.00%) and a lower NZD/USD exchange rate to 0.4000. Such a simple extrapolation as to what will happen in New Zealand this year seems to totally disregard the rather unique position New Zealand finds itself in. We export food and the world still needs to buy that protein. The volume of food sold, unlike discretionary consumer goods, does not reduce in global economic recessions. The price paid for the food may change, but that depends on supply as well as demand. In terms of supply of dairy, fish, beef, lamb, fruit, vegetables and other food products, the NZ export industry is well placed. Lower interest rate and the lower NZD value boost that position. It therefore comes down to international prices for the food commodities we export. Sure, those prices have decreased dramatically from the highs of 12-18 months ago, but they all remain well above long-term averages in NZD terms. Through an export revival the NZ economy is poised to re-commence positive GDP growth later this year, well ahead in time of other countries. The key risk to this view is what happens to the global commodity prices. The stabilisation of oil prices, grain prices and the overall CRB index at the much lower levels provides some assurance that the worst of the downward commodity correction is now over. A New Zealand economy recovering earlier than what most anticipate in late 2009 should see increases in both interest rates and the NZD value also earlier than what most expect.   "”"”"”"” * 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