[willsken]

Quarterly Economic Forecasts (National Bank)

February 2007

Summary

A soft landing has been achieved, with growth slowing from 4.4 percent in 2004 to around 1.6 percent in 2006. The high level of the NZD, restrictive monetary policy settings and net migration coming off from record levels have been key drivers behind the slowdown seen to date.


This slowdown has not alleviated significant imbalances within the economy. New Zealand’s current account position remains perilous, core inflation is still high, capacity utilisation remains at an elevated level and the labour market continues to be tight.


While forward indicators have improved, notably in the housing market, the improvement will not be sustained. Financial conditions have tightened via the rise in the New Zealand dollar. The Reserve Bank is set to hike rates. Imbalances are strong forces curtailing the ability of the economy to regain momentum from the soft landing trough. Economic growth is forecast to remain at 1.6 percent in 2007, before rising to 2.3 percent in 2008.


The currency will be a key dampening transmission mechanism over 2007, and notably through the rural sector. The rural land price cycle has peaked, and we expect this to progressively filter through to the residential sector.


The corporate sector’s main focus over the coming 12 to 18 months will be on costs. Margins and profits are under pressure with businesses bearing the brunt of the slowdown to date. We expect a strong focus on costs to emerge, with this eventually filtering through to labour demand.


The economic slowdown will eventually shift through to households, via a turn in the labour market. Though the unemployment rate will still remain low by historical standards, we expect the household sector to become more interest rate sensitive given the higher leverage they have taken on over the past few years.


Inflation pressures will remain sticky for a while. Lower petrol prices will see headline inflation fall below 2 percent in mid-2007. Yet capacity constraints will see non-tradable inflation and core inflation remain elevated and uncomfortably high.


We expect the Reserve Bank to hike interest rates in March as a late cycle insurance policy, and signal the possibility of a follow-up move. The Bank’s frustration at renewed momentum in the housing market, continued concern over medium term inflation pressure, and discomfort over accelerating wage inflation suggest their patience has run out. Our central forecast incorporates only one hike in March given the tightness in financial conditions and our expectation that recent momentum will not be sustained. But if rebuilding economic momentum broadens further, interest rates will almost certainly move up again.

The late cycle hike will be withdrawn in late 2007 / early 2008, but concerns over medium-term inflation pressure and stimulatory fiscal policy in the 2008 Budget will limit the scope for further moves back to a neutral setting. An aggressive easing cycle over 2009 will take the OCR to 5.50 percent by September 2009.

The NZD will remain well supported early in 2007 by yield chasers, but is set for a downward move in the middle of the year. Softening economic momentum is expected to weigh, and perception towards the carry trade will unwind as global interest rates move up. Tactically, we expect an aggressive 10 cent move mid-year.




Veiw whole report

http://www.nationalbank.co.nz/economics/forecasts/pdf/QEF_Feb_2007.pdf

[Moorf]

Could someone precise that for me into, say, 5 words? :laugh

[willsken]

I would but I'm in the middle of cooking tea.....:exit :laugh

[Cardiff Irons]

Could someone precise that for me into, say, 5 words? :laughNZ$ could go up or down (sorry, that's six).

[Diva]

Could someone precise that for me into, say, 5 words? :laugh

Not in 5, but I can simplify it:

"New Zealand should be on the point of collapse but luckily, because economics is a 'science' in the same way as voodoo, everything is going to be OK"

or....

"I wear a suit and use words you don't understand. Give me your money to invest and if things go well then we will both be driving Rolls Royces. If things go badly, I'll be driving a Rolls Royce and you will be homeless"

That's economics/investing in a nutshell.

[nippa&pippa]

"I wear a suit and use words you don't understand. Give me your money to invest and if things go well then we will both be driving Rolls Royces. If things go badly, I'll be driving a Rolls Royce and you will be homeless"



:laugh

[Super_BQ]

I also get the BNZ weekly report from their chief economist. One thing to learn is ALL analysts are fools in forecasting the future. Unless they're a specialist in a specific area of finance, don't bet on their expertise. Afterall, it was Cullen's concern why all the banks refused to play ball each time he raised interest rates.

While forward indicators have improved, notably in the housing market, the improvement will not be sustained. Financial conditions have tightened via the rise in the New Zealand dollar. The Reserve Bank is set to hike rates. Imbalances are strong forces curtailing the ability of the economy to regain momentum from the soft landing trough. Economic growth...

They've been saying this for the past 2 years!! Countless when the kiwi $ traded from the 50s, 60s and now.

The economic slowdown will eventually shift through to households, via a turn in the labour market. Though the unemployment rate will still remain low by historical standards, we expect the household sector to become more interest rate sensitive given the higher leverage they have taken on over the past few years.

Again, for well over 3 years, NZ's unemployment rate has been among the lowest in the OECD. Hard to see any possible recession even if unemployment rates grow by half as much - NZ is in a shortage of skilled labour. Compounded with so much foreign investment going into NZ pushing the exchange rate up that it could take several years before a turn around occurs. Of all the indicators shown, it's the unemployment figure that ranks the top. When people lose jobs, they can't pay for their mortgage and we should see lots of mortgage foreclosures.

In 5 words: How many foreclosures in NZ?

[Rabbit]

The issues surrounding the NZ economy have been going on for a long time.

Twelve months ago I did allot of research and was keen to understand the situation, in terms of future investment decisions and buying property.

During that time I monitored the press, learnt about the yen/nz dollar investment situation, the imbalances in the economy etc.

Having watched the press and being careful about timing, I thought when the NZ dollar has reached 3.06 to the £ the signals where all there and I should wait a little longer.

I am still waiting, but now the dollar is 2.61 versus the £, and I remain in my rental so the waiting has not paid off.

Someone earlier said that NZ was in good shape relative to the UK, but I believe that the GDP deficit in the UK is around 3.5 versus NZ 9.1.

Meanwhile the US dollar continues to decline and it looks like the Chinese currency will start to appreciate.

Meanwhile, NZ want to shift the thrust from property to alternative forms of investment.

Meanwhile, the NZ dollar continues to appreciate due to high interest rates and carry trades.

Whilst a high NZ dollar, is a big threat, the press view is that it will force only poorly performing companies to go bust, thus releasing human resources to an all ready stretched labour market - so no big deal.

We can all wait forever, in terms of the future, and continue to debate timing.

Let's see what the next interest rate increase brings, and shortly after that the NZ budget.

I have come to the conclusion, that global markets are a bit like global warming - highly unpredictable.

I read an article a few weeks back, that said the NZ dollar would appreciate at 80c against the US Dollar only to fall back to 60c thereafter.

As Avalon says it could go up and it could go down.

Anyone, heard from Avalon lately?, I miss her honest wisdom.

Rabbit.

[willowshouse]

Anyone, heard from Avalon lately?, I miss her honest wisdom.


Did you catch her last post?:

"Fine - Im outta here."

This forum was a far better place with her in it..:(

[Sam B]

I was just thinking that. She made money stuff sound easy. And I loved her rows with BPK. Bring back Avalon! And while you're at it, bring back BPK with his crazy "I hate NZ" posts!

[Super_BQ]

I must of missed Avalon when I 1st joined this forum. I did enjoy her 'sticky' thread she posted that was many pages long. Sorry to hear of her departure.

Some very good thoughts Rabbit. Timing is often a big issue when making any major investment. Sorta like buying shares. There are those that buy low and sell high.. and then new entrants that buy high and sell higher again (from the very shares you've sold to them thinking you've locked in enough profits).

My uni days studying finance showed that in long term investing (ie, 30 or 40 years), the timing when you 1st buy in is almost a non-issue. I've never applied this to real estate but I can't see why it would be any different. Timing is crucial if you intend to have a short stay (ie. less than 7 years or 1 business economic cycle) But if you're holding for like 30 or 40 years - then forget about the timing and jump straight in.

I remember several years ago my cousin told me so many of her peers have gone off to the UK to make the big $. The norm was they all came back rich and was able to buy a new home. Now, I think the tables have turned around because there's a lot of NZ ex-pats coming back from the UK with nothing to show or realising at the time when they left NZ, they thought they could bank big exchange rate gains. The same cousin is flying to the UK for 5+ years. But something tells me the NZ $ ain't gonna tumble even 5 years later.

[stu70]

I am no economist but will make a prediction. By the end of 2007, NZ dollar will have come down from where it is today (highest since floated at 44.5 cents all those moons ago). We will have this post in the archive so it will be good to see how it actually does.

[Trigirl]

currently 74.7 cents (just so thats in the archives too) ;)

[stu70]

It is a normal market reaction; everything that has gone up must come down, especially so if the run has been a rather dramatic one as seen in NZD. One very important thing that will impact almost all the markets around the world come late 2007 early 2008 is what is known as the Presidential cycle. No matter who comes to the whitehouse there will be a rally in the greenback and that in itself will bring other currencies down even if all other factors remain secular to the market conditions leading up to this. For now, it will make a lot of sense to buy GBP, pay off foreign debt..just use the kiwi as much as possible.

[gonzo]

I think we need to be careful about this one. NZ$ has now reached a post float high against the US$ . This is not the case in relation to GBP (it was 0.42 or even slightly higher in December 2005 as opposed to 0.37 and a bit now) Sterling hit a 20 yr high against the US $ the other day at 2.005. The real fact is that for what ever reason the US economy is weak with easing inlationary pressures therefore potentially lower interest rates and short term weakness in currency both as a function of yiels and a loss of reserve status as surplus countries spread their risk away from the once mighty greenback, the reverse is happening in Europe as growth picks up from low levels (particularly in Germany). Wage growth in UK is high and therefore rates will increase to cool down labour market. Given that currencies seem to be increasingly yield driven (carry trades) the question is how close are the respective economies to the top of their respective interest cycles obviously there is no definitive answer but it appears to me that the tightening started earlier in NZ than in Europe so whilst there might be continued upside for the Kiwi againt the US$ its upward potential might be limited vis a vis the euro and GBP.
There are 2 old dealer adages, "let the trend be your friend" and the "trend is a trend until it isn't"
What to my mind is certainly true is that the kiwi is significantly less liquid than any major currency and that illiquidity is a major cause of volatility.

[stu70]

Add to that the institutional profit taking and you will have a serious downward pressure on kiwi in a hurry. NZ economy has too many eggs in one basket(not as diversified as some other industrial nations) and its relatively small size is bound to make swings more pronounced.

[Sam B]

Well can someone just let me know when it will be a good time to bring over the money from my house sale in the UK - not now I can see, but is there a pattern. Is it likely the exchange rate will be more favourable for me soon? Please answer this question very simply! I cannot understand economics.

[Rabbit]

Timing is crucial if you intend to have a short stay (ie. less than 7 years or 1 business economic cycle) But if you're holding for like 30 or 40 years - then forget about the timing and jump straight in.



Hi Super_BQ

as for us (myself and my partner) we are still testing the water, between the ship and the shore so too speak.

That indecision does introduce significant costs and risks.

Once the decision is made to stay long term, I am sure it will be easier, we are just not there yet, and the nirvana economic situation does not exist either here or there.

I guess it takes time, and the delliberations have an associated cost/risk profile.

I have gambled so far, so I guess I willl continue to wait and see what the next few months bring.

All bubbles burst eventually, and I can see a few, both here and also back in the UK, especially on the property and currency front.

A way for us to go yet, and I have great respect for those who can make the ultimate commitment and just get on with it, I guess I am just not there yet, and will continue to hold.

I allways do badly in casino's

Rabbit.

[stu70]

Here is an interesting article (http://stuff.co.nz/4032946a13.html) in the local media. It supports the view that economy and housing sector might cool down afterall (down the pike)..

[Rabbit]

http://www.iht.com/articles/2007/04/25/bloomberg/sxasia.php

As Avalon used to say, it could go up and it could go down.

Is this just another cycle, or is it more than that, I am not sure.

Having read the NZ financial press the last 18 months, they express a negative view, meanwhile property prices and the dollar continue to climb.

Other observations in the press reaveal a shift from property to pensions savings.

Is it a bubble waiting to burst? - or onwards and upwards.

The US Dollar continues to decline, is the NZ economy a house of cards, ready to fall or something else?

Turn-on the immigration tap to keep the ship afloat and bring in external capital and labour?

A rock and a hard place?

The economy needs to change to remain competitive, can it do it fast enough, or will the house of cards fall?

The next major financial entries are the budget, together with the repayment of bonds over the next six months.

Does anyone have a crystal ball? - will it be a fast or slow decline?

Probably, the latter, but who knows?

[stu70]

So a quick update as we go further into 2007, here (http://www.nzherald.co.nz/section/3/story.cfm?c_id=3&objectid=10439188) is the article that talks about how NZD is doing at the moment. Interestingly enough, we are not even into the bullish times for the greenback yet. That will happen in a few months and will have an impact on the kiwi.

[barryp]

What's the basis for being bullish on the US$? I see none. Aside from recent positive growth on US sharemarkets, none of the economic indicators is even remotely bullish. Not sure how that keeps the NZ$ up, but it sure doesn't imply the US$ will be strong anytime soon. (Explicit statements that the Fed wishes a strong US$ are in contrast with their dollar-weakening actions.)