Friday, June 8, 2012

Lower NZ near-term growth, OCR hikes pushed out

We’ve knocked a little bit off our NZ GDP growth forecasts for this year.  Some of the recent partial activity data (e.g. construction) has been on the soft side, knocking our March quarter GDP growth forecast back to 0.5%.  Other small adjustments (lower expected growth in consumption and export volumes) over the course of 2012 take our forecast for the calendar year down to 2.0% (from 2.4% previously). 

Our underlying view of the world remains broadly unchanged.  We expect modest 2% growth in America this year, continued mild recession in Europe (modest growth in Germany offset by continued contractions in activity in the periphery) and a further slowdown in China into the current June quarter followed by recovery into the second half of the year.  Today’s interest rate cut by the PBoC helps that story.

We also retain a constructive view on both the capacity and willingness of Europe to work through the latest bout of fiscal and banking sector angst (see “Growth, austerity and Greece” below).

Our calendar 2013 forecast is unchanged at 2.8% (reflecting stronger global growth, monetary policy easier for longer), with growth then coming off again to 2.0% in 2014 as fiscal policy reaches its contractionary zenith.  Canterbury rebuilding activity supports growth through-out the forecast period.
Despite lower near term growth, we continue to disagree with the market pricing in interest rate cuts (although that has backed off a bit over the last couple of days following stronger than expected GDP and jobs data out of Australia).   The market has recently delivered an easing in monetary conditions via the reduction in wholesale interest rates and the lower New Zealand dollar (remember the MCI?).   

The monetary policy implication of lower near-term growth is that we now join the throng and shift the expected start of the tightening cycle out from the end of this year to mid-2013.  From our perspective, the case for the next move in the OCR being up remains compelling.  It’s still our view that potential GDP growth is lower than it was before (pre-GFC) and the structural unemployment rate is higher than it was before.  That means capacity constraints and inflationary pressure kicks in earlier in the cycle than previously.  (That’s true for most of the developed world – it’s just that growth hasn’t been strong enough yet to test, or challenge, the theory!!)

However, we also remain of the view that this interest rate cycle remains modest compared to the past.  As with other new-normal’s, the neutral cash rate is probably now lower than before.  And of course monetary and fiscal policy will be working in the same direction in the period ahead: contractionary fiscal policy means less work for monetary policy to do.  We’ve still got an OCR peak of 4.5% pencilled in, but with the later start to the cycle, the OCR won’t get to that level until the back half of 2014.