By Roger J Kerr
They say that that an outsider’s observations of the health and outlook for the NZ economy is sometimes more valuable than the views of local commentators as it provides a comparison and perspective against the rest of the world that is sometimes lost on the locals who are maybe too close to the day-to-day action here.
Having been away from New Zealand over the last two months (however keeping abreast of the economic news through the I-Pad) my personal observation is that things have certainly come off the boil for the NZ economy, however we are still a top performer compared to others.
I was mostly in Europe, so perhaps my comparisons are somewhat clouded and biased.
The decisions by the RBNZ to cut interest rates was certainly a surprise to me as it seemed totally contrary to their prior statements and analysis of the economy. Something dramatic must have happened to cause the Governor to suddenly change tack with monetary policy management.
Most cite the sharp falls in dairy prices as the cause, the argument being that a second year of a low milksolids payout is interpreted as very negative for NZ economic growth, spending etc.
If the rest of the big industries outside dairy were slowing up abruptly as well, one could support a monetary easing through multiple cuts in interest rates. However, my assessment (albeit from afar over recent weeks) is that the manufacturing, meat, forestry, energy, retail and construction industries are still trucking along pretty well.
Some economic commentators are now considering scenarios of the NZ economy falling back into recession if dairy prices do not recover.
I find it hard to see such a scenario materialising against a backdrop of very low interest rates (thus plenty of discretionary spending going on), a still booming housing market and employment remaining robust. Maybe the RBNZ and some economic commentators are underestimating the ability of dairy farmers to manage their financial affairs by reserving cash from the good payout years to cover the current poor income years.
How the dairy auctions go at the start of the new Chinese milkpowder buying season in August/September will be closely watched as a key indicator for our economy over the next 12 months. A recovery in Wholemilk Powder prices allowing the economy to continue to trade at a reasonable robust place could render the RBNZ interest rate cuts (in hindsight) as a policy miss-judgement, rather than a monetary policy master-stroke.
The much lower currency value will feed into higher inflation over coming quarters. How other price-setting behaviour in the non-tradable sector transpires will hold the key to future monetary policy decision-making and thus interest rate direction.
The global risk factors from the Greek debt and Chinese stockmarket situations, in my view, are seen as less by the financial and investment markets than what the daily media is hyping up them up to be.
If there was a real worry about these global risks then US bond yields would be lower (investment flight to safety) and the Euro currency value would be smashed in the FX markets.
Neither is the case, therefore I do not see Greece or China as any kind of threat to the performance of the NZ economy over the coming period.
To subscribe to our daily Currency Rate Sheet email, enter your email address here.
Roger J Kerr is a partner at PwC. 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