Opinion: Why Q4-09 growth won't surprise on the high side

By Roger J Kerr Despite the conciliatory tone of recent official statements from the central banks in both the US and New Zealand assisting the “lower for longer” interest rate market mantra, I do not expect our term wholesale swap interest rates to move any lower from current levels. There is also no reason for them to increase for a good few months either, at least until there is more hard evidence of stronger economic growth in New Zealand. It still appears to me that only a material depreciation of the NZD against the USD to the mid/low 0.6000’s will lift annual GDP growth to above 3.00% later in the year, as stronger export industry performance drives the economy higher. In the short-term, the moneymarkets are keenly focused on this Thursday’s GDP figures for the December 2009 quarter. It does not give you much confidence in the economic forecasting fraternity (i.e. bank economists) when the range of forecasts for this number start from +0.5% and go up to +1.8% for a period that started six months ago and ended three months ago! It is all history, yet the forecasters have no idea where it might print. From an interest rate management perspective any outcome above +0.8% will tend to push rates up as the market will conclude that the economy was recovering earlier and stronger than what the RBNZ are forecasting. The economic data we have had to date for the December quarter paints a very mixed picture with some manufacturing stronger, but big primary industry production off a tad. Retail was flat in the December quarter and construction was not much better. Hours worked from the employment data decreased by 0.4%, so it is not that easy to see the number surprising on the strong side. Bank economists persistently cite “stock rebuilding” as a major positive driver of economic growth in the late 2009/early 2010 period. They are applying the historical economic theory that states inventory levels are always rapidly rebuilt up to pre-recession levels as we come out of an economic recession. Historical economic theory is out of the window in this recovery in my view, as businesses throughout New Zealand take the opportunity to permanently reduce inventory levels and apply just-in-time ordering regimes from their suppliers. Do not expect strong GDP numbers as a result of stock re-building this year. The strength of the economic recovery this year and next can only come from the export industries who are now enjoying record high product prices and will expand/invest even more when the Kiwi dollar comes off some more. In conclusion, one has to say the economic forecasting gurus in New Zealand may still have more credibility than the bank economists in Australia who have resorted to following the RBA picks of journalist Terry McCrann (wasn’t he Arthur Daly’s sidekick?) as their central source of intelligence. For the record, our forecast for the GDP is +0.6%, thus helping the “lower for longer” lobby group. —————- * 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