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BNZ Weekly Overview and Offshore Overview 20/11/08

Welcome to the November 20 2008 editions of the BNZ Weekly Overview and Offshore Overview.

Sharemarkets have weakened around the world again over the past week with yet more deepening of concern for the global economy over 2009. Forecasters are falling over themselves to downgrade predictions for growth in all economies next year and there are significant downside risks to the New Zealand economy as a result of this. Commodity prices are falling away with Fonterra set to announce a reduction in its forecast payout. The outlook of tourism seems to be getting worse on a weekly basis and redundancies are already being announced in the sector. Given the extremely large number of small companies which operate in the tourism industry the 10% decline in visitor numbers we think will happen at a minimum over the coming year will produce a lot of layoffs that don't hit the headlines as happened for the national air carrier this week.

The good news is that the Kiwi dollar continues to fall away and for unhedged exporters there is some insulation against the tsunami of weakness developing offshore. A falling Kiwi dollar is also happening at the same time as wholesale interest rates are dropping at an extremely rapid pace. The yield on 90 day bank bills is now around 5.8% compared with 6.4% last week and 7.2% three weeks ago! Over time falls in wholesale interest rates will take retail borrowing costs down to much lower levels but the pace of decline is going to remain heavily influenced by the credit crisis offshore which has pushed up wholesale funding costs.

Petrol prices also continue to decline and are now at their lowest levels since February last year.

Continued extremely high volatility in financial markets is likely over the next few months with downside risks to economic growth that will manifest themselves as New Zealand's unemployment rate heading towards 6%.

In the Housing Section this week we consider whether fixed housing rates falling below 8% will cause a rise in real estate sales anytime soon.


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