Michael Daly is the investment strategist at BNZ Investment Management.by Michael Daly
New Zealand has been waiting to put on a better economic showing in 2001, after the patchy effort of last year, bedevilled as it was by a collapse in business and consumer confidence domestically, and despised by the international community as reflected in the collapse in the NZ dollar.
The dominant positive driver for the economy is the very low level of the exchange rate.
By the fourth quarter of 2000 it had depreciated by over 30% from its early 1997 peak on a trade weighted basis, to the lowest level in 14 years. This has been, and remains, a powerful impetus to the economy via the income windfall accruing to rural and manufacturing exporters.
While prices for New Zealand's export basket in world terms are up a modest 10% or so over the past year, in NZ dollar terms the increase is, at nearly 30%, the most explosive in the history of the ANZ Commodity Price Index.
Surveyed confidence in the agricultural sector is very buoyant, as it is among manufacturers, with a rising expectation for capital expenditure and job growth in the year ahead. Credit demand in the rural sector is very buoyant.
Consistent with the rise in business confidence in recent months, business credit demand is firming up. A flow-through into the rest of the economy via higher consumption spending would be the next phase of the process.
With 2000 being the strongest in many years for global economic growth, and a return to favourable domestic climatic conditions, export-led growth in 2001 has seemed a certainty. Add to this record tourist numbers and a stabilisation in the housing construction cycle, and the ingredients for growth of around 4% has been on the cards - until now.
The sharp slowing in the US economy in the fourth quarter, and to a lesser extent the Australian economy, has marred the outlook for NZ's export boost to GDP this year. Global economic growth forecasts have been cut sharply in recent weeks, leaving forecasts made only a few months ago looking high and dry.
The fact is that New Zealand's economic cycle, via trade, is closely tied to that of the US and Australia. There has been no period in the past 20 years in which local growth has increased while US growth has decreased.
The scope for real net export growth in 2001 to be the driver of economic resurgence has lessened, but not, we believe, disappeared. Real growth among New Zealand's trading partners will still be positive this year, allowing another year of positive real export growth.
Private consumption and fixed capital expenditure should grow, in line with expected further employment and real disposable income growth, as well as much improved business confidence. Total real GDP growth will be less than expected a few months back, but 3% is still achievable.
As with the economic cycle, New Zealand's short term interest rates cycle tends to follow that of the US (allowing for the currency's volatility which in the past has been a monetary conditions indicator in its own right.) While the December Monetary Policy Statement projected short term rates rising by over 100 basis points over the next year, clearly a lot has changed since then. With offshore interest rates falling, the Reserve Bank will be loath to move in the opposite direction.
While New Zealand may be among the most tardy to cut interest rates, given the different stage of our business cycle, we expect our rates to be some 50 basis points lower by mid year. Thereafter, the trend in rates will depend on how much further the US Federal Reserve and the Reserve Bank of Australia need to reduce their interest rates, if at all.
The exchange rate of the NZ dollar is likely to continue to appreciate, driven by expected US dollar weakness, a relatively tighter New Zealand monetary policy compared to the rest of the world, and more rapid growth in employment relative to our trading partners.
While the headline inflation rate has smashed through the top of the target range to 4.0%, driven by currency weakness and the recent spike in the international oil price, it has likely peaked.
The inflation rate should fall rapidly over the course of the year as a number of one-off price pressures dissipate, to around the 2.0% level by year end.
Michael Daly is the investment strategist at BNZ Investment Management.
Michael Daly is the investment strategist at BNZ Investment Management.
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