Stephen Toplis says markets are viewing New Zealand more in the nature of a safe-haven than a vulnerable peripheral

By Stephen Toplis*

Markets the world over continue to trade off Europe’s malaise.

New Zealand’s markets have been no exception.

Indeed, they have reacted noticeably to the global concerns. Local wholesale yields have continued to drop, down to new multi-decade lows, traversing the money, swap and government bond curves. The exchange rate, meanwhile, continues to come off its highs of a few months ago.

Notably, the TWI is now more than 7% below RBNZ expectations (a potential inflation booster to keep tabs on). Softening interest and exchange rates are providing tangible buffers to the NZ economy, increasing the chances it can muddle its way through the global mire.

How much of a mire? Who can be sure?

What we do know is that the consensus forecasts for the European economic bloc continue to get chopped. According to the very latest monthly survey from Consensus Economics, Euro-zone GDP is now seen expanding just 0.4% in 2012, following an expected 1.6% for 2011. While this represents a marked slowdown, it still infers fractional quarter by quarter growth, rather than the contractions (read, recession) feared by many regarding the European bloc. That’s not to say who’s right and wrong on the matter. Just that these are the latest reference points.

With so much focus on Europe’s malaise and drama, it’s worth noting that the economic forecasts for the United States have actually been bumped up this month.

This is partly on the back of reasonable preliminary results for Q3 GDP – with the annualised rate coming in at 2.5% – but also reflective of the run of positive monthly data in the States of late. Such things have, at least for now, allayed fears of the double-dip recession talked about since mid-year.

As things stand, the consensus now expects US GDP growth of 1.8% (from 1.7%) for 2011 and 2.1% (from 1.9%) for 2012.

The other sign of resilience in the face of a sagging Europe – at least in terms of how the professional forecasters see it – has been in the consensus expectations for emerging-market economies.

The numbers for the Asia-Pacific region, for instance, stopped softening, with GDP growth of 4.5% seen for 2011 and  5.2% for 2012. This supposed a soft landing for China, relatively robust paths for the rest of Asia, and a steadying expansion of 3.5% for Australia in 2012 (after a weather-hit 2011, of 1.6%). Again, this is no guarantee of success. But it is, to be fair, the central scenario of the market commentators at present.

And while the view on Latin American and Eastern European GDP growth continued to ebb in November’s consensus survey it was still in the nature of incremental fine-tuning rather than any collapse vaguely comparable to that of the 2008/09 Global Financial Crisis.

While many might question the likelihood of the emerging-market economies, in the face of a softening Europe, battling forth in the manner expected, the notion is at least consistent with the fact global commodity prices have proved robust to the international distress and uncertainty.

Such things feed the mixed messages we’re still getting regards the global economy (even though the balance of it is negative).

While we are, of course, concerned about Europe’s prognosis, we are still left weighing the overall impact on New Zealand’s full trading-partner demand. And how much of the recent market moves reflect the coming of another GFC-type environment as opposed to a powerful reallocation of money out of European-infected markets and into those seen as less risky.

In this context, one could argue markets are viewing New Zealand more in the nature of a safe-haven than a vulnerable peripheral, in the sense that yields are being flattened mainly by a weight of international money, that domestic credit spreads are holding in (especially regards government debt) and that the currency, while down, has not fallen out of bed by any stretch of the imagination.    

As for the local data calendar this week, it’s relatively low key (in what is the final working week before the 26 November General Election, which the polls suggest will very likely return a centre-right National-led government).

This afternoon’s credit card billings for October are bound to be big, given the culmination of the Rugby World Cup during the month.

For similar reasons, October’s short-term visitor arrivals, published Tuesday morning, are set to show another hefty annual gain, of near 20% (30,000 people), building on September’s surge from the RWC beginnings. October’s net immigration, however, might struggle to avoid another negative.

Tuesday afternoon’s RBNZ Survey of Expectations might well show a reduction in inflation expectations. They certainly need to come down, from recently sticky heights, with the closely-watched 2-year-ahead annual CPI inflation measure at 2.9% in the previous (quarterly) survey. In the least, there are signs that inflation itself is becoming less threatening for the meantime. And not just because the GST spike from last October is beginning to wash out of the various annual measures, but in a core sense too.

Also note the RBNZ survey’s views on near-term GDP and the labour market, as useful real-economy pointers. For reference, we still expect Q3 GDP to expand in the order of 1.0%, and Q4 as much as 1.1%. Witnessing such results would go a long way to shoring confidence in the NZ economy, through a period of substantial international distress. We also forecast the NZ unemployment rate to keep trending in the right direction.

As for Thursday’s merchandise trade figures, we’re looking for a largely seasonal deficit for October, of $422m (close to market expectations), comprising moderate annual growth in exports and imports individually. This would be a small enough deficit to keep the annual balance in surplus. However, the more general dynamics in New Zealand’s current account are likely to see its deficit enlarging next year, and beyond.

While this is something to be concerned about (much like the global outlook itself) there is at least the potential for the NZ dollar to correct by much more than it has to date. It’s a reminder of the way NZ monetary conditions can ease in response to perceived distress, much as they have done already over recent months.

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Stephen Toplis is head of research for BNZ. You can contact him at stephen_toplis@bnz.co.nz