By Roger J Kerr
Whether you believe that the moneymarkets and/or the RBNZ will be forced to alter their current view on the timing of OCR increases this year comes down to how well the economy performs in the first half of 2011.
Current media and economist commentary on the economy remains pretty gloomy, focusing on static retail and housing sectors over the second half of 2010 as the key drivers of the economy in 2011.
It is of course very easy to look back at the flat 2010 economy and conclude that nothing is happening any different this year to change that benign outlook.
Such a conclusion runs the risk of being horribly inaccurate in my view.
On the assumption that the NZD/USD exchange rate comes back to the 0.7000 area to help the profitability/investment of the big primary industry exporters, the economy is poised for much more robust growth this year.
The September 2010 quarter GDP was negative because dairy and meat production was down due to climatic factors.
Both could easily bounce back upwards in the December quarter.
Manufacturing definitely improved in the December quarter and recent retail/employment data does not suggest we are not in for another shock negative GDP number when the December quarter figures come out in late March.
I see the mood steadily improving over coming months as the 2011 data prints stronger.
With the improved sentiment will come rising one to three year swap rates as the interest rate market starts to realise that 3.00% annual GDP growth does bring with it inflation risks.
If the RBNZ are managing monetary policy on a 12-18 months forward look basis (as they must be) they will not be able to hold the current complacent approach too far into the year.
The double-dip recession advocates are completely ignoring the main driver of the economy – agricultural commodity prices, which are at 30-year highs.
Here’s why I see the 2011 economic data improving:-
- Another milksolids payout lift from Fonterra will encourage some spending in the provinces as the debt reduction phase runs down.
- Increasing dairy farm land values have now repaired farm balance sheets and the bankers will be calling off their hounds if they want to maintain/grow their lending levels in 2011.
- Rural confidence surveys are up with the fantastic prices and more certainty around winter feed stocks and grass growth (thanks to the summer rain).
- Business and consumer confidence surveys displaying positive sentiment cannot be wrong two years in a row!
- Job security and thus household spending decisions will lift with the more upbeat economic numbers coming through.
- Outside the RWC and Canterbury earthquake rebuild, the forward bookings for tourism look much stronger this year.
- New business investment is starting to increase with business/commercial credit from the banks increasing in December for the first time in nearly three years.
- The residential property market is no longer a lead indicator for the economy, thus irrelevant to any discussion on what will be driving the economy in 2011.
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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
28 Comments
May be to consider:
The tight relationship between GDP, standard of living and oil use
http://crash-watcher.blogspot.com/2011/02/export-land-model-analysis-for-usa-part_13.html
This analysis takes a few minutes of reading, valid in the conclusions not only for the US but for NZ as well.
Also, to get may be a more wider understanding by looking at the situation during the last depression in the 30's and not just looking at the lovely green grass in our own backyard:
http://www.theburningplatform.com?p=10725
GRAPES OF WRATH - 2011
and a sneak preview of:
THE ALTERNATIVE MARKET PROJECT
by Brandon Smith (aka Giordano Bruno)
All links via Chris Martenson website.
"...recent retail/employment data does not suggest we are not in for another shock..."You mean like yesterdays' tumbling' retail sales figures and the last unemployment survey figure that was up?
For New Zealand's exporters there might be some good news regarding foodprices, yet once higher transport/oil prices kick in - your guess what happens.
Roubini's next crisis is scary food for thoughts:
http://www.bloomberg.com/news/2011-02-03/roubini-s-next-crisis-makes-fo…
I typo in the link?
This is I assiume it....
http://www.bloomberg.com/news/2011-02-13/roubini-s-next-crisis-makes-fo…
regards
Sort of a sweeping comment "the residential property market is no longer a lead indicator for the economy." If anything, the collapse in housing volumes in early to mid 2010 were a perfect indicator for what is likely to have been two negative quarters of GDP growth to December 2010.
On what basis have you made this assumption? To me it is more relevant than ever.
I have followed the missives of Mr Kerr for as long as he has been contributing to this site and I feel that some of you are being a tad disrespectful. In fact Mr Kerr has, over the years, developed an almost unblemished record as a contraindicator on almost all subjects he opines on.
What none of you realise is that he is actually advising his clients to do the opposite of what he suggests on this blog.
That must be the case or he wouldnt have any clients left eh?
"The double-dip recession advocates are completely ignoring the main driver of the economy – agricultural commodity prices, which are at 30-year highs."
No the main driver(s) of the economy are global financial mess/debt and oil (ie energy costs)...IMHO. If energy stays this high we will see recession....which will effect our commodity prices....2011 could be really rough......
regards
Steven - you wonder if he heard Bollard (and when you google Bollard, and 100 a barrel oil, you only get Interest.co.nz - it's the only place that thought to print it? - well done, Bernard)
"But as oil prices rise, this places pressure on inflation not just in New Zealand, but globally, risking a bursting of the commodity boom just like the 2007-08 event. Indeed if oil prices escalate beyond US$100 for long, growth in much of the world will suffer again," he said.
Misses the point that food commodities, and water, are like energy - you die without them, but not too bad. Kerr is obviously of the 'at a certain price, a substitute will be found' brigade.
Don't know if it would work for water. :)
Steven - you wonder if he heard Bollard (and when you google Bollard, and 100 a barrel oil, you only get Interest.co.nz - it's the only place that thought to print it? - well done, Bernard)
"But as oil prices rise, this places pressure on inflation not just in New Zealand, but globally, risking a bursting of the commodity boom just like the 2007-08 event. Indeed if oil prices escalate beyond US$100 for long, growth in much of the world will suffer again," he said.
Misses the point that food commodities, and water, are like energy - you die without them, but not too bad. Kerr is obviously of the 'at a certain price, a substitute will be found' brigade.
Don't know if it would work for water. :)
You just have to go back to after $147USD oil and see what happened to Fonterra's milk price for one to see the effect of oil on commodities....and this time I dont expect as shallow a dip or as short....so we already have some over-valued, over-stretched with debt farmers and a drop in dairy income....nervious bankers.....not a good mix.
NZ has been lucky, we have sat here and kept a lid on things and stayed mostly quiet while the world's central [bw]ankers went mad in trying to recover the world's economy....it didnt work, at best some life support in intensive care was achieved. Now we see inflation the result of the fast rebound in commodity (oil) prices because too many ppl are chasing barely enough food and energy....and AGW events will get worse and more frequent...while the population still tries to climb....
Blind ppl....Im surrounded by blind ppl.......
regards
"the bankers will be calling off their hounds if they want to maintain/grow their lending levels in 2011".
Read also Wespac's plans to "grow" New Zealand i.e. suck in more debtors
That's what we need - more debt, never mind that most farms and households are up to their eyeballs already.
Our monetary system starts to fall apart without debt going up by 10% a year as it has for decades now. The banks want to get back to those "happy days" but production required to service that debt has only been going up by 5% in nominal terms.
Looks like we have a problem. Can any one remember a time when GDP growth was greater than debt growth? Is there no way out?
Good on yer , Rogie . Someone has to stay on deck and tootle his horn as the NZ Debtanic slides under the icey waves of the Australian banking industry .
What the feck did we achieve from that housing bubble , gifted to us by the previous government ? .... If everyones' houses went up in value , the only gain is if you clear off to somewhere that house prices remained static . I can name a few villages 'like that in the Philippines , but shit runs down the street through open sewers ( I kid you not ) .
"The double-dip recession advocates are completely ignoring the main driver of the economy – agricultural commodity prices, which are at 30-year highs."
If NZ was a nation of ALL farmers then maybe you would have a point Roger, Problem is though that most average kiwis can't even afford to buy milk & other agricultural commodities made RIGHT HERE in NZ so what you claim is YET AGAIN utter BS!
Many farmers are more focused on their farm property prices than actually producing anything worthy of the debt they now owe the banks.
Your simply quite out of touch with reality Roger. So much so that I feel sorry for you
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