New Zealand’s faltering economic recovery continues to take shape with the country’s central bank keeping its key interest rate steady yesterday, and joining the nation’s Treasury department in hinting at a return to positive growth.
As reported earlier in the week in Air, the NZ Treasury thinks the economy has started growing after more than a year in slowdown mode.
But unlike Australia, where the argument is over the strength of the recovery and whether interest rates should rise and the stimulus spending continue, the NZ Reserve Bank believes there’s a ways to go before that happens there.
“We continue to expect to keep the cash rate at or below the current level for some time,” Reserve Bank Governor Alan Bollard said in a statement after leaving the official cash rate at a record-low of 2.5%.
He said that could be until the latter months of next year.
Bollard said the economy requires further stimulus from low interest rates because the medium-term outlook is weak even as a “patchy recovery” gets under way.
A significant change in emphasis in the statement confirmed the better outlook with Mr Bollard omitting the phrase that the cash rate “could still move modestly lower” that was in his July statement.
"There is more evidence that the decline in economic activity is coming to an end, and that a patchy recovery is underway," he started his statement yesterday
"This is partly due to recovery in our trading partner economies in the June quarter and these look likely to continue expanding in the short term.
"Domestically, retail spending appears to have stopped falling, following a rise in net immigration and a pick-up in the housing market over recent months.
"However, the medium-term growth outlook remains weak. We expect household spending to grow only modestly given weak income growth and a reduced appetite to take on debt.
"Business profits are under pressure because of the low level of activity and the elevated New Zealand dollar; this limits the scope for employment and investment to rebound quickly.
"For growth to be sustained in the medium term there is a need for improved competitiveness in the export sector and a continued recovery of household savings.
"This rebalancing is required to stabilise New Zealand’s external payments position.
"If the exchange rate were to continue its recent appreciation and/or the recovery in house prices were to undermine the improvement in household savings, then the sustainability of the present recovery will be brought into question.
"Annual CPI inflation is currently well within the target band and is expected to track comfortably within the band over the medium term.
"As we have said previously, the forecast recovery in economic activity is based on monetary policy continuing to provide substantial support to the economy.
"We expect such support will be needed for some time. As a result, we continue to expect to keep the OCR at or below the current level through until the latter part of 2010."
So the New Zealand dollar rose to close to 70 US cents in the wake of the decision on rates and statement.
The currency is up 39% in the past six months, a show of strength that is hitting exporters hard, but trimming imported inflation.
In joining Treasury in forecasting the reappearance of growth in the third quarter, the central bank brought forward its previous estimate for a resumption of growth of the fourth quarter.
Previously, it expected growth would be delayed until the December quarter.
The central bank said in its latest Monetary Policy Statement that the economy will grow by 1.3% in the first quarter of 2010 from the first quarter of 2009: up from the 0.8% forecast in June.
Annual growth will accelerate to 3.6% by the first quarter of 2011.
The Treasury Department said this week it also expects the economy will grow in the three months ending September 30 (See earlier report below).
There’s not the same angst in Australia about the way the Aussie currency is rising towards 90 cents (having hit several 12 month highs this week).
But the Reserve Bank knows that the currency’s appreciation will make the already substantial loss in our terms of trade, that much deeper.
That’s also happening in NZ where figures also released yesterday confirmed a deep fall.
Statistics New Zealand said the country’s export prices suffered their biggest drop in 58 years as the nation’s terms of trade index for a contracted for a fifth straight quarter.
Export prices fell 11.6%, thanks to the appreciation of the Kiwi dollar in the June quarter and a sharp fall in the world price of milk powder and other dairy products, NZ’s major export.
Import prices fell 2.9% and the terms of trade index plunged 9 percent.
The terms of trade index, which measures the amount of imports New Zealand can buy from a fixed quantity of exports, fell to the lowest level since the third quarter of 2006.
Statistics NZ said New Zealand’s trade-weighted currency index rose 8.7% in the three months, the biggest rise in 24 years.
The fall in export prices was the largest since 1951, led by a record 24% percent drop in milk, butter and cheese prices. Meat, aluminum and lumber prices also fell
While export prices are declining, the volume of shipments is increasing as farmers recover from a drought last year and the new Maari oilfield off the coast of the North Island began producing.
Export volumes rose 7% in the quarter (Australian export v
