I’m sorry this month’s newsletter’s a little later than usual, but I was hoping to send it in the new format I’ll be using in future.
Unfortunately some pieces of the new software needed for this aren’t quite ready – so here’s the last of the newsletters in the old format.
By the way, the new format will be called Global View. Like the current newsletter is will report on the New Zealand economy with a bias towards how it affects the property and business finance markets. It’s a regular economic commentary delivered to you by email every month.
I’ll also be introducing a new newsletter called Global Update. This is a new email newsletter reporting on the financial products available in New Zealand and explaining how you can get the finance you want. It will be delivered to you by email immediately these products and services become available. I’ll be sending you the first of these in the next week or so.
The major news items about the New Zealand economy over the last month have been
• the drop in oil prices,
• business confidence is up (or rather less negative),
• capacity constraints are up near the all time high,
• the demand for Eurokiwis and Uridashis continues,
• the announcement of a huge balance of payments deficit,
• a re-weighting of the Consumer Price Index,
• a fear that inflation (world wide) is not under control,
• and a mortgage rate war amongst the banks.
Looking at the big picture, the global economy continues to grow and is now experiencing its longest run since the 1980s. And it’s being led by the “developing” countries like China and India. According to IMF’s World Economic Outlook, developing economies have accounted for 62% of global GDP over the last four years. China has contributed 26% of this and India 8%.
This is quite a turn around. In the 1980s and early 1990s it was the “advanced” economies that contributed 60% of global growth.
One of the major effects of this has been a supply of cheap money to the “developed” countries as the huge surpluses from the new economies look for a home. This in turn has been a major driver of the consumer and housing boom here and in the western world. See last month’s newsletter - archives are available on our web site. To see CTRL click here http://www.globalpacific.co.nz/wa.asp?idWebPage=8635
But now it looks like the U.S economy is starting to slow down. The gross domestic product, which measures economic activity in a country, rose 2.6% between April and June compared with 5.6% in the first quarter. It is becoming clearer the residential property boom in the U.S. now over and is the major contributing factor in the slowdown in activity.
This decrease in the rise of residential property prices – which is also being experienced in Great Britain, Australia and here – means it’s likely consumer spending will drop as owners cease to use the increased equity in their houses to spend in excess of their incomes. Right now it looks like a housing slowdown is more likely than a crash.
The wild card continues to be the rise in interest rates.
Fixed rates here have been coming off over the last few weeks as the expected Spring mortgage war between banks started much stronger than expected. But this has come at the expense of bank margins as wholesale rates have been rising. It’s conceivable the “war” may not last long.
In fact fixed interest rates have been rising since May because swap rates have been rising since April. And I suspect they’re still on the rise again. In fact most of the banks here have just put up their 5 year fixed rate.
And if New Zealand’s balance of payments deficit deteriorates further, this country’s S & P sovereign credit rating of AA could be at risk. This would result in higher interest rates.
On top of all this, it’s becoming more likely the Reserve Bank will lift the Official Cash Rate – and consequently floating interest rates – on 26th October. Inflation risks are now becoming too hard to ignore.
• The welcome drop in oil prices has helped increase business confidence and dampen inflationary expectations. The recent quarterly survey of business opinion by the New Zealand Institute of Economic Research shows 19% of firms expected a general deterioration in business in the next six months. This is much lower than the 44% in the June survey and 61% in last December’s. However the same report showed capacity utilisation – a measure similar to employment – was extremely high at 92.3%. Firms reported the shortage of labour as being the limiting factor to increasing output. This will increase cost pressures and inflationary expectations.
• The mortgage war may well be short lived but until interest rates actually rise the demand will continue. In fact the perception of an interest rate increase may well fuel demand for housing. Buy now while interest rates are low.
• The spectre of the maturing Uridashis and Eurokiwis not being reinvested has not occurred. In September $880 million matured but there was $1.3 billion of new issues. It seems like the global appetite for high yielding currencies like the NZ dollar, and the “carry trade” – see last month’s newsletter - has not diminished. This will continue to keep the Kiwi high. It’s gained nearly 10% since falling below U.S. 60 cents in June – and is unlikely to fall sharply this year. The high dollar hurts exports and means higher import costs. Both boost inflation.
Of course an increase in the Official Cash Rate is not a foregone conclusion. There’s been some relief for the Reserve Bank by the re-weighting of the Consumer Price Index. This will take place with the release of the third quarter CPI on the 25th of October – strangely enough the day before the Reserve Bank announces the Official Cash Rate.
These changes will put a much higher weight on petrol prices and a much lower weight on the purchase cost of new buildings. The timing of the change on petrol comes just after the massive price rises of the second quarter and should help drag inflation below the key 3% figure. The lower weight on housing means inflation will be less sensitive to the housing cycle.
Cheers
JP
John Paine B.Sc. Dip BIA
Global Pacific Corporation Limited
112 Gladstone Road, Parnell,
P O Box 3229, Auckland, New Zealand
Phone 64 9 303 3700, Fax 64 9 303 3031
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Email john.paine@globalpacific.co.nz
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