A strong rise in manufacturing, inflation well under control, house prices looking up: no wonder New Zealand Reserve Bank head, Dr Allan Bollard was optimistic this week about the country’s economy.
In a mid-week speech to Hawke’s Bay Chamber of Commerce, Dr Bollard said "some form of recovery is now on the horizon" and it offered the country a chance to get "on to a more economically sustainable track".
But then ratings agency Fitch had to go and throw some cold water on the emerging party yesterday by downgrading new Zealand’s outlook to negative from stable, while reaffirming the country’s existing AA-plus credit rating.
Fitch said it is concerned by the economic outlook and the size of the nation’s current account deficit which the agency said was large and projected to remain above the level necessary to stabilize and cut net debt,
‘The rating comments also came a day after Finance Minister Bill English who said the economy faces a “bumpy” road as it recovers from the slump, and comments by Prime Minister Keys.
He blamed under investment and poor productivity for many of New Zealand’s woes and its relatively poor prospects.
In May, the Government deferred income-tax cuts and cut spending to contain a rise in spending and debt, a move that saw Standard & Poor’s to revise its credit rating outlook to stable from negative.
That was even though the budget deficit could rise to nearly 7% by 2011.
Now Fitch has gone the other way and suggested that deeper spending cuts might be needed.
“A stronger fiscal adjustment than currently planned may be required to raise national savings and reduce the current account deficit, as well as structural reforms to improve productivity.”
According to the latest figures, New Zealand’s current account deficit was 8.5% of gross domestic product in the year ended March 31.
That’s higher than the US was then (but its going higher, closer to 10% this year) and lower than Australia. It is well below that in Japan and the UK.
In May, the government forecast the first budget cash deficit in nine years and said the gap might widen to 6.9 percent of GDP by June 2011.
The stronger NZ dollar has hurt exports, but also helped keep inflation lower. Mr Bollard this week tried to talk down the value of the Kiwi currency with comments suggesting it had to be lower to boost exports.
The NZ dollar fell to around 64 US cents after the Fitch update was issued.
Fitch said yesterday the currency “appears more responsive to global financial conditions than to domestic economic fundamentals.” (That could also be said about the Australian dollar as well).
The ratings company said low interest rates and an “accommodative” fiscal stance means households may not reduce spending and borrowing enough to reduce the current account deficit and the nation’s external debt to a safe level.
“Against this backdrop of external vulnerability, more aggressive restoration of public finances through fiscal prudence will be needed to raise the national savings rate to counter weak private savings.” Fitch said.
So the drop in inflation to the lowest level for nearly two years didn’t rate with Fitch.
Consumer prices rose 1.9% in the year ended June 30, according to figures from Statistics New Zealand.
That was down from 3% in the year March and an 18 year high in the September quarter of last year of 5.1% as those record oil and fuel costs boosted the cost of living not only in NZ, but around the world.
The CPI rose 0.6% in the June quarter from the March quarter, which is a sedate reading.
NZ inflation is now back into the central bank’s target range of between 1% and 3% for the first time since 2007.
(We will find out next Wednesday is that’s happened here in Australia).
Meanwhile there was an upturn in new orders in the NZ manufacturing sector.
The latest survey by BNZ Capital and Business New Zealand, showed that the seasonally adjusted Performance of Manufacturing Index (PMI) rose to 46.2 in June.
This is an increase of 3.1 points from May and 1.2 points from June 2008.
It’s still negative (a reading under 50 is contraction, above, is expansion) but the two key indicators of production (47.6) and new orders (52.2) rose 5.6 and 10.6 points respectively.
The significant increase in new orders was the largest month-to-month increase in the history of the survey, surpassing the 9.4 point lift between May and June 2004.
New orders were a positive reading for the first time since April 2008, while production was also at its highest level for nearly a year.
In that it mirrors upturns in output and PMI surveys in China, Japan, the UK, Europe and the US in the past fortnight or so.
