A Quiet Week with Mainly Negative News

Thursday 4 December, 2008

It's been a relatively quiet week with regard to economic data and news in New Zealand. We have seen the release of data showing the annual net migration flow still running just above 4,000 though on a monthly basis there is no net gain under way at the moment. It's likely to be next year that we eventually see some improvement in net migration flows as expat Kiwis come back home because of extreme weakness in foreign economies and the attractiveness to New Zealanders of going overseas diminishes quite substantially.

The big negative locally was Fonterra's announcement of a reduction in this year's forecast milksolid's payout to $6 per kilogram from $7.66 last year and an initial forecast of $6.60 season. The reduction will inject caution into the regions though the falling NZD and continuing world population, income, and protein demand growth suggests the medium to long term outlook remains strong for the dairy sector.

In the financial markets expectations are extremely high that next Thursday morning the Reserve Bank will cut the official cash rate by at least 1% with a few punters picking the cut could be 1.5%. At their last review the RB noted they are still keeping eye on domestic inflation but the situation internationally has deteriorated quite substantially over the past few weeks as seen in sharemarket weakness and further selling of risky assets such as the Kiwi dollar. Our currency traded below 52.0 US cents during the week but has ended close to 55.2 cents this afternoon.

Of interest however is the Kiwi dollar's decline to below 84.0 cents against the Australian currency and this will please many manufacturers. It should also please those in the tourism industry. Like other forecasters we think visitor numbers are likely to fall about 10% over the coming year as people offshore shut their wallets in the face of the worst global downturn since the Great Depression. However the Kiwi dollar's decline against the Australian currency and the fact the Australians themselves will not be travelling all that much because of weakness in the economy and their currency’s collapse against other currencies improves the relative attractiveness of New Zealand.

Internationally attention has been on a fiscal stimulus package announced in the United Kingdom that will blow out the government's budget deficit, comments by President-elect Obama indicating a substantial fiscal stimulus package for America in the near future, the American government's bailout of Citigroup, the Fed.’s new US$800bn package, and more bad economic data.

Source: Tony Alexander, Chief Economist of the Bank of New Zealand.