Opinion: Hope not translating as bank credit conditions tighten

By Roger J Kerr Judging by recent their recent comments in the media, it is not hard to conclude that local economists (most of who are based in Wellington) don’t get out much. The various economist forecasts for the March quarter’s CPI released last week were for an increase in inflation of +0.8% for the quarter. They were all very surprised when the number printed at +0.4% with no-one factoring into their prior forecasts price falls for electronic equipment, furniture, clothes, shoes and sporting goods. A casual walk around the shopping malls would have told you that the 30%-off Boxing Day sales just continued for another four months into 2010 as retailers discounted to make sales. The retailers were assisted by the NZD currency gains last year on imported items, however their profit margins are squeezed and thus it is no surprise to see vacant shops in many of our High Streets. The CPI numbers really confirmed how flat the domestic economy is at this time. Retailers need to discount heavily to prise consumer wallets open. The Roy Morgan consumer confidence survey still has a whopping gap between current conditions and future expectations. The “hope for better things in the future” we have consistently witnessed in high consumer and business confidence surveys for over nine months now has not translated into the reality of increased spending and investment in the economy. Households are taking much longer to make adjustments to their monthly budgets as we come out of recession than what most economic forecasters predicted. I suggest this theme should be prominent in the RBNZ’s OCR review statement this Thursday. If the RBNZ fail to comment on the domestic economy being more subdued than generally expected for this time, they too are mis-reading the conditions. The RBNZ have a challenging year ahead balancing the subdued domestic demand against the various one-off price increases lifting the headline inflation rate (ETS, GST, ACC levies and tax changes increasing insurance premiums) which they have to “look through” when setting monetary policy. This is a stack of price changes for the RBNZ to ignore. Their life is further complicated by food and energy prices rising as well. What cannot be ignored however when analysing the domestic and export economy is the fact that bank credit conditions have tightened considerably and this is already acting as a major handbrake on spending, assets values and investment. The Australian banks are not looking to grow their New Zealand balance sheets; there are more lucrative bank lending deals elsewhere in the world. Credit is much more constrained than at any time over the last in 30 years in New Zealand. Let’s hope the RBNZ understand this economic reality as they ponder the pace of OCR increases over the next 12 months. —————- * 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