By Roger J Kerr
My reading of last Thursday’s Monetary Policy Statement ('MPS') was that the RBNZ are overly paranoid about Europe and arguably schizophrenic about the NZ economy.
So much of their analysis of current and future economic conditions just didn’t add-up.
The global economic environment right now does make it very hard for forecasters to have any level of certainty; however consistent themes should be expected:
- Downbeat economic assessment (business investment and consumer spending subdued) not reconciling with a positive +3% GDP growth forecast for 2013.
- Forecasts of general NZD depreciation (thus higher prices for imported consumer products) and resource pressures in the building sector, not reconciling with their benign CPI inflation outlook.
- Forecast of commodity prices sliding further on top of significant reductions in recent months appears to completely ignore China’s ability and preparedness to stimulate (via monetary and fiscal policy) demand/growth and thus this underpins commodity prices.
- "Consumer spending and house prices will remain weak" (page 7) – despite residential investment increasing substantially and mortgage rates being at record lows.
- CPI inflation forecast track higher than March MPS, yet overall statement regarded as more downbeat than March MPS.
- Capacity for the economy to grow at only 1.5% per annum due to slow business investment over recent years. However, they are forecasting +3% GDP growth, therefore elevated inflationary risks has to be the conclusion.
Westpac called the RBNZ statement "hawkish", whereas the mainstream media interpreted the statement/economic outlook as “gloomy” – take your pick.
Both are wrong.
Thursday’s GDP growth numbers will satisfy the doomsayers if it is below +0.30% for the quarter.
Australian GDP growth for their March quarter surprised on the upside two weeks ago. Could we do the same?
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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
20 Comments
ii've thought that for years roger. the rbnz moto seems to be to continually undermine confidence. the very act subduing credit markets and investor confidence into submission. we have the same battles at work. we may have an exposure with one counterparty for a million $$$ spread over 3 loans. each one may be $1 overdue normally becasue of the timing of one payment. commonsence says that the loan is good .. oh but no it is $1 overdue hence the million dollars is past due according to the rbnz. that is unless it property related tehn it is all fine and dandy - what a nonsense. is it any wonder it is pointless reading financial statements these days
I suspect overall the RBNZ are struggling with their single goal of inflation; and their single tool to fight it with; the OCR. They have probably realised that most major economies in the world have significantly managed depreciations in their own currencies (and so, unjustified appreciation of the NZD), and that they have mostly done this by money printing or capital controls. So the RBNZ will realise we have been forced (to the extent we've done nothing about it) to be uncompetitive in our trading (through the currency); but still have plenty of foreign cash sloshing about (from the foreign money printing and capital controls) buying up our assets or lending us money to spend on whatever essential or frivolous things we feel like. So GDP growth will be down due to uncompetitiveness, but inflation's okay while the currency is too high.
It might well have occurred to them that the Christchurch rebuild is a two edged sword. It will lift activity in the short term in a very defined geographic area, so causing some local stress points in property, building wages and the like; possibly explaining a short term blip to 3% growth? If they try and squash that overall, they risk depressing the rest of the country, and/or other industries outside building, so weakening our trading even further.
So maybe they are caught schizophrenically between their current failing paradigm, and what even they suspect they should be doing.
Roger , I see you are very bullish , and its evident that you are on a roll in your business .
I am not seeing this in the general business environment here , and can fully understand the RBNZ pessimistic outlook .
I was overseas recently , and everything looks fine , people are going about their business , shopping malls are full , traffic jams are widespread , tourists still seem to be everywhere , and there is a veneer of relative opulence in parts of Eurpoe .
The reality is not what you see .
There are huge problems in the Eurozone which makes up 25% of world GDP ( much bigger than China.)
At home you need to remember that Kiwis' are saving and deleveraging , and also that during recessions people save for a rainy day .
Records in the US show the historivally, life insurance and related investement product sales increase in bad times , people are fearful ,hence the hunker down mentality .
As investment advisor , you are no doubt extremely busy , yields in the money markets are terrible , so people like you are swamped by those seeking advice.
The reality is not what you see . We are bouyed by an artificailly strong NZD , which is not really strong , because everyone else is actively weakening their currencies .
Low interest rates are keeping the NZ train on the tracks , but this is going to end up a train smash when rates go up, as they must .
"a train smash when rates go up, as they must" its interesting taht some ppl see rising rates no matter what...........4 years and we see inflation is getting lower....ie dis-inflation...
So rising, no not in the forseeable future IMHO, however if you take the payments on the interest then consider the affordability when we see a depression with deflation and wages collapsing then yes.....its going to hurt.....a lot.
regards....
"but this is going to end up a train smash when rates go up, as they must ."
Boatman, I really don't think rates going up while demand is flat is on the horizon because they (RBNZ) are already capable of fiddling the CPI to make it suit any 'perceived' outlook they chose to invent.
Bollard has made it quite clear on numerous occasions that he wil do nothing to pop the debt bubble, EVEN if they have to go lower with the OCR for a decade of more. The most perplexing problem for the NZ economy right now is the overvalued NZD (or should i say the last decade to date) Speculation on our currency is killing our very way out of this mess..........Exports
Roger is the paranoid one - obsessed with a coming boom for the past 4 years that has never eventuated.
I spoke with our ChCh plumber today. He says business is so quiet that they are hoping staff will leave so they don't have to lay them off! He says new build activity is at terribly low levels, the worst it's been in years.
Yet there is apparently a need for 20,000 workers in the city? And Treasury are banking on the rebuild to drive growth! All unlikely.
Where's the "growth" in having investments & pre existing infrastructure destroyed and THEN having to rebuild it all again?
That's not growth, maybe on the BS GDP scale it might be class as such but in the real world it's a f***ing disaster as you know.
The "growth" they talk about is in reality just more/new debt. Every single dollar that you think you own is OWED to/by someone else
Let's look at Roger's track record:
10 weeks ago Rog said 10 year US bonds were unsustainable rallying down to 2.05% - now they're at the 1.5-1.6% level!
http://www.interest.co.nz/bonds/58775/lower-us-bond-yields-are-unlikely…
A year ago Rog told us we were misreading the economy if we were thinking interest rates to fall (mid 2011) - where are interest rates now Rog?
http://www.interest.co.nz/opinion/54296/those-who-think-economy-struggl…
I guess anything is possible.......our exports are poor because the Dollar is high....if we head to a world wide recession that will drop, so of course will the demand for our produce...the other alternative is we see world wide growth but that drives up the NZD and makes our produce too expensive......seems to be a lose lose.....and then there is Chian and that looks ugly...
During all of this of course Roger only sees one side, inflation....he doesnt even offer comment and logic to dismiss the probability of recession and contraction....
regards
personally I don't know why this website publishes his rubbish. His forecast record is poor and his reasoning is often a shambles. Is he an old mate of one of the interest.co.nz top dogs or something?
A brilliant example of his limited intellect is this statement:
- Downbeat economic assessment (business investment and consumer spending subdued) not reconciling with a positive +3% GDP growth forecast for 2013
well, duh! The prediction of 3% growth is largely based on what the reserve bank see as rebuilding finally getting underway in ChCh, this will obviously have limited geographical benefit spread, and limited consumer spending impact beyond ChCh (ie. very limited impact in 90% of the population)
sorry if I am being overly harsh, but people who publish need to expect this kind of reaction, especailly when they publish trash
Roger, if you were about to sign on to a new partnership agreement (TPP) and needed every hand on deck working to sell the gambit, it all fits rather nicely. The New Zealand media has spent the past two years talking about the Greek problem; clearly, without understanding any aspect beyond phrases like: "They've lived beyond their means - Don't pay their taxes - are lazy." Given the lack of any information of any depth from MSM, it is no wonder the sheep are all looking in the same direction.
Not you fellas, though.
"If what I'm about to say is even halfway true, the economies of countries like Australia and New Zealand, which we visited recently, as well as many others, are in for a brutal shock.
I single out Australia and New Zealand because their economic growth, indeed by now their entire economic performance, which has been far better than the US and EU in the past 5 years, would be torn and frayed to shreds if the Chinese economy would hit one or more serious snags. And from what I see I can draw just one single conclusion: it will. The consequences down under will be shattering."
"China is not some miracle story, it's simply just another part of the insane global credit bubble machine we've all thought was making us rich. We know better now, or should at at least, and the Chinese soon will too."
http://theautomaticearth.com/Finance/goodness-gracious-great-walls-on-fire.html
Some great insights into what's going on in China. And we've tethered our ship to this bizarre experiment? Good luck with your expectations of rising inflation and interest rates, Roger.
I think Roger is a die hard moneterist? As are many RB's and indeed Govn's...hence part of the reason we are not fixing this mess....they cannot fathom why we are not growing and having inflation so therefore see its going to happen "suddenly" and we will have "problems"....the data, alternative economic theories and behavior of the wealthy (who are running to US and german bonds) doesnt suggest Roger is right....its Overwelming in fact IMHO.
Whats striking is Roger is supposed to be into "risk management" yet Ive never seen him do/wite about any....
Deflation doesnt exist according to him it seems....
regards
Steven
I have no problem with altenative views whatsoever, in fact I enjoy them. What I do have a problem with is alternative views that are presented on poor logical grounds. I think publishing trash like this undermines this website's credibility. But that's just my view.
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