Opinion: Slower and longer upwards

By Roger J Kerr It’s time for something of reality check on the speed and extent of the widely expected increases in short-term interest rates over the next 12 months. Evidence is mounting that the upwards trajectory may not be as steep as the interest rate markets have been pricing. I have been prattling on for months about the fact that the NZ domestic economy (housing and retail) will be “flat” for most of 2010. Recent data on mortgage lending, residential construction activity and retail sales confirm the very subdued trading conditions in the domestic economy. The average household is still quite uncertain/insecure about employment and income levels, therefore they are spending less and reducing debt burdens. The export part of the economy was looking much better with outstanding international prices. However, the spreading of drought conditions to the big agriculture producing provinces of the Waikato and Canterbury has to reduce volume production and put a dent in GDP growth forecasts. Here at APRM we struggle to justify +2.00% annual growth rate as a forecast for 2010 given current data and trends, so god knows how these other economic gurus confidently predict +3.5% to +4.5% growth this year. If actual GDP growth outcomes are nearer to our forecast this year, the RBNZ will see lower inflation risks and thus will not be in any massive hurry to get 90-day rates up to 5.00%. While we see 2010 economic growth as nothing spectacular, the outlook for 2011 is very positive for the NZ economy, particularly if the export commodity prices stay high and the NZD/USD exchange rate comes down somewhat. CPI inflation data for the March quarter should be close to the RBNZ forecast of +0.3% increase for the quarter. The RBNZ are more accurate on this forecast than anyone else. Food and petrol will be up in price, however imported consumer goods lower as the NZ dollar above 0.7000 feeds through to retail prices. The RBNZ will have a lot of price increases to ignore and “look through” this year as Government policy changes with the emission trading scheme and GST increases lift prices along with overseas determined oil and commodity prices. In the flat current economic environment the RBNZ would have to rate “second-round” price increases from the aforementioned as less likely. —————- * 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