Economic recovery has reversed, meaning next OCR hike will be in June 2011, NZIER says

Economists are beginning to pick June for the Reserve Bank of New Zealand's first hike in the Official Cash Rate due to a weak recovery and falling inflation expectations against the backdrop of rising turbulence in global markets.

The New Zealand Institute of Economic Research (NZIER) this morning said it now expected the first rate hike to be June 11, following yesterday's announcement from ANZ National economists that they had pushed back their timing until the second quarter next year.

In its December 2010 Quarterly Predictions, the NZIER said New Zealand's economic recovery had reversed.

"We expect wintry economic conditions this summer," NZIER’s Principal Economist Shamubeel Eaqub said.

"Critical indicators like house sales and QSBO (Quarterly Survey of Business Opinion) domestic trading activity point to a slow finish to the year, even without the destruction and disruption of the Canterbury earthquake in early September. A double dip recession cannot be ruled out, but it is not our central scenario. Instead, we expect weak activity over coming months, before a more sustained recovery from mid 2011,” Eaqub said.

A slow housing market was set to take its toll on economic growth, with current house sales numbers suggesting growth will slow sharply in late 2010 and early 2011, he said.

Meanwhile BNZ economists have also said the next OCR hike could be pushed back to June following a decline in inflation expectations in yesterday's National Bank Business Outlook.

"The RBNZ will take some comfort from the inflation signals dimming a touch," BNZ economist Doug Steel said.

"The indicators are certainly not calling for any immediate action from the Bank. We currently have next March pencilled in for the next upward nudge to the OCR. But, given the wider economic developments (think subdued property market, risks to agricultural production, and renewed global economic growth concerns) there is a growing risk that the next OCR hike may well be later than currently anticipated," Steel said.

Here is the release from NZIER:

Wintry economic conditions ahead

Domestic spending is soft…

“The economic recovery has reversed. We expect wintry economic conditions this summer. Critical indicators like house sales and QSBO domestic trading activity point to a slow finish to the year, even without the destruction and disruption of the Canterbury earthquake in early September. A double dip recession cannot be ruled out, but it is not our central scenario. Instead, we expect weak activity over coming months, before a more sustained recovery from mid 2011,” NZIER’s Principal Economist Shamubeel Eaqub said.

The details are in NZIER’s December 2010 Quarterly Predictions – a comprehensive and independent commentary on the New Zealand economy and forecasts covering the next five years. Details and insights are available exclusively to NZIER members.

…so the Reserve Bank can hold off on rate hikes for longer

The growth hiccup, distant inflationary pressures and escalating global risks mean the RBNZ will hold the OCR steady for longer. We expect the first OCR increase in June 2011.

We expect economic growth to recover from 1.7% in 2010 to 2.3% and 2.9% in 2011 and 2012 calendar years respectively. The recovery will be shallow and volatile. The Canterbury earthquake will weigh on growth in late 2010, but boost GDP growth next year as reconstruction begins and the regional economy reverts to more normal spending patterns.

Global outlook is full of risks

Global risks have escalated in recent months as the fallout from the Global Financial Crisis (GFC) continues.

Quantitative easing, fiscal austerity and bail outs are prevalent. The solution to the GFC is less spending and more saving. This will hurt the demand for our exports: 41% of New Zealand’s exports go to countries with public debt in excess of 50% of GDP.

Global currency wars will affect the New Zealand Dollar, which will remain elevated for some time. The policy options for managing this appreciation are very limited and could cause more harm than good. 

Businesses will do it tough

Businesses should plan for a shallow economic recovery. Economic activity will be weak through late 2010 and early 2011, but we expect a more sustainable and broad based recovery from mid 2011. For businesses with tight capacity this is the time to invest; to capitalise on a more sustainable recovery from mid 2011. For those with excess capacity, it will be a case of prudent risk management in the soft patch.

A grim outlook from house sales

Figure 1 is taken from Quarterly Predictions. The blue line shows economic growth. The grey line shows annual change in house sales nine months earlier. House sales suggest economic growth will slow sharply in late 2010 and early 2011.

A small boost to construction from Canterbury reconstruction

Figure 2 also taken from Quarterly Predictions. The grey line shows our baseline construction forecasts and the blue area shows the impact of the Canterbury earthquake, some initial displacement of previously planned work and reconstruction from early 2011. The Canterbury construction will partly offset weakness in the sector.

(Updates with BNZ comments on possible June OCR hike.)