By Roger J Kerr
The RBNZ Monetary Policy Statement this Thursday may surprise the financial markets in being somewhat more “dovish” on the outlook for the economy next year.
The RBNZ look to trends in the residential property market as a key indicator for the strength of the domestic economy.
Recent data for house sales and building permits have been weaker and this should cause the RBNZ to be less optimistic about GDP growth in 2011.
Even though the RBNZ acknowledge that the super high export commodity prices is very positive for the economy, they see housing and retail continuing to be week and thus off-setting the export growth.
They are also convinced that dairy farmers will apply all their additional income to repaying debt and not spending/investing it.
Given these underlying economic assumptions, it would not surprise me that the RBNZ lower their current 2.5% GDP growth forecast for 2011 come Thursday. I think they will be making a mistake in doing this and will be forced by stronger economic numbers by March/April to revise their growth forecast back up again.
They will also then be behind the 8-ball in removing the emergency monetary stimulus and getting monetary conditions back to “neutral”.
They will also be forced to concede that stronger than expected GDP growth elevates future inflation risks, thus official interest rates could be increasing a lot faster in mid-2011 than what most realise.
The continuing high export prices and stronger business confidence indices do not suggest GDP growth below 3.00% next year. Earlier this year, rising business confidence turned out to be a false hope and not much more. Today the rising confidence appears to be much more firmly based on forward orders, sales and profits all tracking much better.
Despite all the economic analysis and scenario setting, at the end of the day the rate of GDP growth may well come down to whether it rains over the balance of December or not. A summer drought pulling down agriculture production would certainly deliver actual 2011 GDP growth near to the current pessimistic forecasts of sub-2.00% from Standard & Poors and NZIER.
Perhaps the RBNZ economists should be paying more attention to the long-range weather forecasts and forgetting about their love-affair with the residential property market.
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* 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
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