Economy had momentum before last week's volatility, meaning NZ might just fumble through current global mess, BNZ's Toplis says

There was sufficient momentum in the economy prior to last week's market volatility to suggest New Zealand might just fumble its way through the mess on the international scene, BNZ's head of research Stephen Toplis says.

Data released today showing New Zealand's services sector expanded strongly in July was a reminder the economy is, or at least was, headed in the right direction toward recovery, Toplis said.

The BNZ-Business NZ Performance of Services Index recorded 54.5 in July, above the average monthly reading of 52 for the survey, and down slightly from 54.7 in June. A score above 50 indicates expansion of activity in the services sector, while a score below 50 represents contraction.

The survey added to data showing activity in New Zealand's manufacturing sector also expanded in July and consumer confidence readings taken before last week's global market turmoil that showed levels rising

"Such optimism by consumers should have been bolstered further by heightened expectations that interest rates will stay lower for longer thanks to last week’s dramatic repricing of the likelihood of a September rate hike. As if this wasn’t enough, falling petrol prices should also provide some well-needed relief on the effective real disposable income front," Toplis said.

"Even the housing market appears to be stabilising. Sure there is no evidence yet of any significant pick up in prices but there is a lot of evidence to suggest that downside risks are abating. This was exemplified with the released of REINZ’s latest data which, although showing a further 0.6% drop in house prices for the month of July, lent further weight to the view that turnover is picking up from year earlier levels, which is usually a precursor to some upward price adjustment," he said.

"Barfoot and Thompson’s data painted a similar picture with sales up 21.0% on year earlier levels while listings continue to fall. Rents too, while a tad down on a month ago, were still up 2.2% on this time last year."

Even actual retail spending was not looking too bad. Core retail electronic card transactions in July were 0.5% up for the month and a very hefty 8.0% for the year.

"Given that retail is one of the hardest hit sectors in the economy, this is hardly a devastating result."

But....

"Of course, all the above reflect the state of the world, and the New Zealand economy, prior to the disastrous week we have just experienced in global equity markets as fears over the European debt crisis grew and the perceived outlook for the US economy deteriorated. The real question is what damage will the ructions do to New Zealand looking forward and are they sufficient to derail the recovery that we were experiencing? Alas, the answer is it will take some time before we can have any confidence in the answer," Toplis said.

"There will be two initial transmission mechanisms to monitor. To the extent that the global rout causes a drop in global demand New Zealand will be adversely impacted. That said, it is important to realise that this drop in demand must feed through into Asia and Australia for that hit to be meaningful. This would appear likely but equally, it is likely that the negative shock will be nowhere near as bad in these regions as will be the case for the “old-world” of Europe and the United States," he said.

"Secondly is the impact that the fallout has directly on domestic confidence. In this regard we may already have some unwelcome confirmation that the hit will be real.

"Last week’s BNZ business confidence survey revealed a sharp drop in business optimism from net 45% optimistic to just 22%. This still leaves confidence at levels consistent with modest growth but this survey would have only just picked up the first step in the global correction. A further fall of this magnitude when the next survey is conducted would be very worrisome indeed," Toplis said.