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BNZ Weekly and Offshore Overview, July 17 2008

Welcome to the July 17 2008 editions of the BNZ Weekly Overview and Offshore Overview.

Economic data releases have been thin on the ground both locally and overseas in the past week. Here in New Zealand we have learnt that inflation hit 4% in the year to June and on our calculations will reach 5% in three months time. Petrol prices so far will already push the CPI up 0.7% in the September quarter.

The Reserve Bank will be quite concerned about high headline inflation feeding into higher wage demands and business selling prices. But with the economy in such a weak state they can be confident the second round impact of higher food and energy prices will be limited. That means monetary policy is going to be eased before the end of the year and most probably from early September. It's almost the toss of a coin whether they decide to start the cycle next Thursday morning. We think they won't.

It has been a week of high turbulence in the United States with another bank collapse and the Federal government being forced to bail out two mortgage lenders involved in around half of all mortgages in the United States. The sharemarkets have been on a roller coaster ride with a firm rise overnight assisted by a sharp drop in oil prices. But the drop in oil prices is because of a deteriorating outlook for the United States and world economy so that doesn't seem too positive that the end of the day.

At this stage there is no reason for believing positive growth surprises may lie in store for the New Zealand economy over 2009 especially as the extent of weakness in the household sector means businesses are being forced to cut back spending to address cash flow collapses. This means some lay-offs, reduced production in order to get inventories down, and holding off some capital expenditure.

But just as there are plenty of bargain hunters internationally looking for cheap share prices so too should firms in New Zealand who have their cash flows under control keep an eye out for good staff freed up by other companies, good premises made available by other companies slimming down or closing, and export opportunities that will open up as the Kiwi dollar eases. Watch tourism though as rising airfares and diminishing airline capacity could create a worse fall in numbers than during the late 1990s Asian crisis.


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