FYI | Jun 30 2008
By Chris Shaw
March quarter GDP data for New Zealand paints an ugly picture, suggesting a recession is likely this year given the economy contracted slightly in the period and appears unlikely to recover in the June quarter.
The data showed a 0.3% contraction in GDP for the three months to the end of March, Credit Suisse noting areas of the economy to record declines included consumer spending, residential and business investment and net exports. In contrast the only increases were recorded in government spending and stock building, making the composition of the figures very weak in the broker’s view.
As Macquarie notes the figure may have been even weaker had it not been for a run up in inventories which boosted the figure by 0.8%, as elsewhere the weakness in activity was quite broadly based. GSJB Were agrees, taking the view the headline number is concealing how weak the broader economy is, which in turn means the currently restrictive level of monetary policy is inappropriate.
This has the broker predicting rate cuts by September, though it sees scope for cuts to begin as early as July given the likelihood of the economy slipping into a recession. UBS agrees, seeing scope for rate cuts to either come earlier than expected in July rather than September as most have factored in, or coming in September but being of greater magnitude than is currently priced in. This implies a cut of 50-basis points rather than the 25-basis points the market currently anticipates.
According to Macquarie, action will be needed as there is little to suggest any recovery in the third quarter of the year given soaring fuel prices and mortgage rollovers, which are limiting income growth. As well, the downturn in the housing sector will put pressure on employment and the level of interest rates mean little in the way of currency relief can be expected for the export side of the economy.
But as Credit Suisse points out even while the economic data of late strengthens the case for the Reserve Bank of New Zealand to be more aggressive in lowering rates from what are currently restrictive levels, the central bank’s ability to act is being hindered by persistently high inflation readings, meaning relief in the form of a significant easing in monetary policy at present remains somewhat unlikely.
Macquarie doesn’t see the inflation issue as so significant though, estimating as much as 55% of inflation is of the non-tradeable form and so is likely to decline on the back of weaker economic activity, which in turn will open the way for an easing from the current high level of interest rates.
