Trading Partner Growth Forecasts Plummet
Data Flash (New Zealand)
NZ: Trading Partner Growth Forecasts Plummet
As expected, the October edition of Consensus Forecasts has revealed a huge downward revision to forecasts of GDP growth for New Zealand's largest trading partners.
The 14-country index that is followed by the RBNZ now points to average trade-weighted trading partner growth of just 1.3% yoy in 2001 (previously 1.8% yoy ) and 2.1% yoy in 2002 (previously 3% yoy).
The total cumulative downward revision over both years since the July edition - that used by the RBNZ when compiling the forecasts in its August Monetary Policy Statement (MPS) - is now a staggering 1.9pps.
In its August MPS, the RBNZ produced an alternative lower growth scenario which according to the Bank's forecasts was consistent with an official cash rate (OCR) around 75bps lower than the baseline scenario (the baseline scenario projected the OCR to remain around 5.75-6%).
As the chart below shows, we estimate - perhaps conservatively - that the October consensus forecasts imply a scenario that is several multiples worse than the Bank's alternative scenario.
All other things equal, and assuming that lower world growth feeds through into lower commodity prices etc in a broadly proportionate way, this would suggest that the OCR should be 200bps or more lower than the RBNZ's August baseline scenario - ie sub 4%.
Of course, not all else is equal. For example, the economy grew by much more than the Bank expected in Q2 and the NZD is tracking a little below the RBNZ's forecasts. Moreover, most economists expect a strong rebound in global growth later next year as exceptionally easy monetary policy (and in the case of the US, fiscal policy) underpins a synchronised global recovery.
Nonetheless, if the RBNZ is to be consistent, it is difficult to see how it could not now conclude that the OCR needs to be set somewhat lower than the present 5.25% (the Bank has already eased 50bps since August).
We think a 25bp cut is close to a done deal. Moreover, we think that a 50bps cut is also a fair prospect (35% probability), especially given that the next meeting is not scheduled until 24 January.
Indeed, while not our central call, should the flow of data remain very negative, we think it is not inconceivable that the OCR could be lowered to 4.5% following the 24 Jan meeting. In this scenario, Q1 2002 GDP is likely to be flat, if not negative. We think this is a distinct possibility given the precipitous declines in both business and consumer confidence (the latter confirmed by last night's Colmar Brunton survey, which showed a further fall in consumer confidence from -1 to -10 - in line with last week's TV3 survey).
Darren Gibbs, Senior Economist, New Zealand
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