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Impact of the Earthquake

Impact of the Earthquake

The most significant event this week is clearly the devastating earthquake in Christchurch and our hearts go out to all those affected by this new disaster. It goes without saying that just as the September 4 earthquake disturbed economic activity for some time so too will this one and that means the near zero growth we think occurred during the December quarter is going to be not much bettered in the first quarter of this year if in fact there is any growth at all. The interruption to growth is enough that we now see little
chance that the Reserve Bank will feel the economy is strong enough and inflationary pressures great enough that they will raise interest rates this year. At this stage we pencil in the next rate rise for January 2012. That means we are likely to spend practically all of this year with the same comment in our ‘If I were a borrower what would I do” Stay floating.

The reduced outlook for interest rates implies the Kiwi dollar will be slightly lower than would otherwise have been the case, especially as inflation rhetoric is picking up in the UK and Europe raising the chances that interest rates will be increased in those economies well before the end of the year. Yet perversely the exchange rate effect of the earthquake improves even further the outlook for the country’s dairy sector which seems well on the way to reclaiming its throne (recently held by the now shrinking tourism sector) as
the country’s largest export earner.

This week Fonterra revised up their forecast payout for this season from $7.30 -$7.40 to $7.90 - $8.00. This payout will incorporate the traditional milk solids payout of $7.50 plus a distributable profit range of 40-50 cents.


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