Growth Prospects Deteriorate Slightly
News of the week this week just has to be the fall in the US dollar following the US Treasury Secretary’s comments at the G7 Finance Ministers meeting in France over the weekend, and the resulting rise in the NZD through US 58 cents. The range US 60-65 cents beckons. We discuss the movements in the FX markets in our foreign exchange rate section.
In the absence of any major data releases in New Zealand over the past week it may be useful to try and get a feel for whether the outlook for the NZ economy has got better or worse over the past couple of months. It will come as no surprise to anybody that we think the outlook has got worse, though not tremendously so. The problem however is that as we have been warning for some time the risks still seem to lie mainly on the downside. They are currently manifesting themselves as weakness in many regions of the country, but Auckland will feel the slowing growth later this year and be at risk of a bit of a shock over 2004 if the long predicted upturn in world growth is delayed yet another year.
Lets start with the positive developments over the past few months first.
Interest Rates Borrowers will be feeling happy about the declines in interest rates. Compared with late March the 90-day bank bill yield has fallen half a percent to near 5.3% from 5.85%, and with the Reserve Bank set to cut the official cash rate another 0.5% in the coming 2-3 months bill yields will settle close to 5% soon. Further out along the curve we have seen yields continue the downward trek they have been on broadly since June last year. The benchmark three year swap rate has fallen to near 5.45% from 6.1% two months ago and 7.1% a year ago.
Housing The housing market has proved more resilient than many were predicting. In April sales were down 1.9% from a year ago. But when one allows for April last year being boosted by Easter falling in March, and April this year being depressed by Easter and the ANZAC long weekend effect the result is in fact quite good. Dwelling consents also recovered by a seasonally adjusted 21.7% in March with apartment consents leaping from 54 to 476.
Employment We know the labour market has remained firmish so far this year. Hours worked soared by 1.9% during the March quarter although the more stable job numbers outcome was a rise of just 0.5%. The various indicators of labour market tightness which we monitor and wrote about in last week’s Overview remain firm. Job ad numbers in the ANZ April survey also recovered by a seasonally adjusted 2.2%.
Vehicle Expenditure Expenditure on commercial vehicles appears to have remained strong with registrations in April up 1.3% from a year ago and March ahead by 14.4%. Even tractor registrations were up 14.4% in April from a year ago, though in March they were off 18.4%.
NZD/AUD Of relevance for exporters to Australia is the pullback in the exchange rate to 89 cents from 93 cents two months ago. We’ve also lost 4% against the Euro.
Oil International oil prices have pulled back leading to cuts in petrol pump prices here in New Zealand.
Population The monthly migration data show the annual net gain to our population from net migration flows is continuing to rise. This will underpin the housing and retailing sectors.
But that is about where the positives end. The negatives are more numerous. To whit.
Exchange Rate The NZD has jumped from US 55.3 cents to near US 58.2 cents as the greenback has fallen against all other currencies in a structural adjustment reflecting the growing US trade deficit, budget deficit blow-out, weak growth outlook, falling interest rates, and abandonment (it seems) of the “strong dollar” policy. The NZD has also risen near 1.7 Yen and made a tiny gain against the pound.
Drought The drought has continued in many parts of the country and the forecast is for normal to below normal rainfall through to Spring. This is bad news for farmers in the affected areas and we have seen high levels of animal slaughtering. Many sharemilkers have failed to find any contracts for the new season starting on June 1 and face selling their cows at basement prices.
SARS SARS appeared on the world scene about two months ago and although it may have peaked it clearly is depressing economic activity and short term growth prospects in many parts of Asia, directly hitting NZ exporters of goods such as shellfish, flowers, crayfish etc., and will keep the tourism industry in check over Winter. Partly as a result of SARS the forecasts for growth in our top 14 trading partners this year and next have worsened marginally.
Electricity Crisis An electricity crisis has developed with soaring spot prices forcing some NZ companies to cut output and even send employees home. Consumers are being warned of hot water cuts and confidence in the country’s infrastructure is taking a dive when one throws in events in the rail area as well.
Commodity Prices Our export commodity prices have weakened on average 1% in world price terms between February and April.
Confidence Business confidence has plummeted to its worst level since the middle of 2000 with poor readings for most subsidiary indicators.
Terrorism Al Queda appear to be active again and this can only dent confidence worldwide, willingness to travel etc.
Mad Cow Disease The appearance of this disease in one animal in Canada is likely to place extra downward pressure on beef prices, fairly much leaving lamb as the only major part of the pastoral rural sector still showing some strength.
The big negative change is clearly the rise in the NZD. Export prospects have taken a hit (apart from manufacturers sending goods to Australia) and the farming sector will be worst affected. Given the surge in farm debt over the past two years by about 46%, the drought, the risk next year’s dairy payout is less than this year’s projected $3.60, and too much spending on hire purchase in the past two years, the regions are going to face a challenging 12 months.
As a result of the deterioration in economic prospects over the past two months we have reduced our growth projections for about the next 18 months. Whereas previously we were forecasting gross domestic product growth of 2.6% this year and 3.0% over 2004 we are now forecasting 2.2% and 2.6% respectively. We have cut forecast jobs growth for this year to 1.3% from 1.8%. We don’t see a recession as remotely possible unless a fresh downturn occurs in the US economy causing falling commodity prices, sharemarkets, and confidence. But one thing is becoming clear regarding US growth prospects. While they may not be too bright in the next few months the range of stimulatory pressures is growing and the authorities have clearly signalled they intend doing whatever it takes to get the economy humming again. It is Presidential election year in 2004 after all. So hopefully come some point in 2004 – and maybe even late this year – an improving US economy will drag the rest of the world up and allow our export prospects to brighten, eventually leading to a recovery in our domestic sector.