NZ economy facing uphill battle

NZ economy facing uphill battle

By Chris Smith (General Manager, CMC Markets New Zealand)

Friday 10 December 2010: Economies often need an injection of stimulus to move forward again after a recession. This can come in the form of lower interest rates, government spending, or in more severe cases – quantitative easing. In extreme cases, it is wars that stimulate growth. In New Zealand’s case, it may well be the re-build after this year’s earthquake, according to the Reserve Bank governor.

The governor this week made it clear that we are facing a long climb out of the recent recession. The board decided to leave rates on hold at 3 per cent, and indicated they would not be moving up much higher than that for at least the medium term. The housing sector is providing a real drag for the economy and the elevated NZ dollar is retarding the ability of the external sector to rebalance the economy.

On the commodities front, gold reached a record high this week of around $1,416 US/oz. It came on the back of an announcement by the US president that he would extend the Bush administration’s tax cuts. This is seen as an inflationary policy and has seen renewed interest in gold (as a hedge against inflation). There is also the argument that the administration can’t afford the tax cuts and gold has been seen as a safe haven alternative.

The next data set to watch will come out of China. We are expecting to see their trade figures today and that will be followed tomorrow by a slew of data from retail sales to industrial production. The market will be watching these figures closely.

Markets generally still feel a bit range bound given constrained confidence levels. There are simply too many risks at present to warrant any significant exposure to risk.

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