FYI | Mar 09 2009
By Chris Shaw
As Commonwealth Bank New Zealand economist Chris Tennent-Brown puts it, the more the global economy weakens the worse is the outlook for the New Zealand economy, and the global economy is deteriorating rapidly.
Tennent-Brown notes in the space of two months forecasts for New Zealand trading partner growth for 2009 have fallen from a decline of 0.1% to a fall of 0.9%, with this likely not fully factoring in the weakness evident in the December quarter.
Conditions could therefore get even worse in coming months, Tennent-Brown pointing out there is something of a snowball effect in the US at present as unemployment insurance claims are accelerating and this implies further labour market weakness, while at the same time the US housing market is yet to show signs of stabilising. Financial market news is just as bad as earnings news generally has disappointed and there are growing fears for the health of European banks given their exposures to Eastern Europe.
This weakness is flowing through to the New Zealand economy and on Tennent-Brown’s numbers the economy is likely to record a December quarter contraction of 1.0%. A similar outcome is expected in the March quarter and he doesn’t see the economy returning to positive GDP growth until 2010 given business confidence is weak and the outlook for both employment and housing continues to deteriorate.
Some in the market have taken the view since the Reserve Bank of Australia (RBA) didn’t cut at its last meeting the Reserve Bank of New Zealand (RBNZ) is likely to follow suit when it meets this week but here Tennent-Brown disagrees. He points out the Australian economy remains in far better shape than is the case in New Zealand.
As well, the fact fixed interest rates dominate in the New Zealand housing market means many households are yet to benefit from the cuts to interest rates made so far, while the New Zealand government simply has less scope for fiscal stimulus measures than is the case in Australia. In Tennent-Brown’s view this means a bigger cut can be expected by the RBNZ this week.
Market consensus at present suggests a rate cut of between 0.5% to 1.0% and Tennent-Brown favours the latter outcome. If the cut is lower than he expects, Tennent-Brown suggests further rate cuts would then be more drawn out but eventually rates will still get to a level of 2.0% in his view, down from a current level of 3.5%.
At this level the RBNZ would still have wiggle room for further cuts but, as Tennent-Brown points out, the central bank may then choose to look at other possible actions to restore business confidence and support economic activity. He suggests alternative actions may include the purchase of long-term assets including government and corporate bonds.
