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Weekly Commentary

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The good, the bad and the ugly

Mon, Mar 31 2008, 05:59 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank

It was a huge data week last week, with a real mix of strong and weak outturns.

Credit card transactions for February came out at 0.7%, confirming only moderate growth in retailing so far this year. This is not surprising given that Westpac Consumer Confidence for Q1 showed a dramatic fall to a 10-year low of 96.5. Almost all components of the index deteriorated in the quarter, with the biggest fall being in the short term outlook for the economy. Rising food and petrol prices, high mortgage interest rates, drought, falling house price inflation, and turmoil in global financial markets are all painting a grim picture in consumers’ minds. Even so, the extent of the fall in confidence this quarter has left us stunned, coming as it does at a time when the hard data to hand so far suggests the NZ economy is in fact experiencing the best economic conditions in a generation – very low unemployment, very strong terms of trade, and a strong fiscal balance sheet. In the past, pessimistic readings on confidence have usually occurred after confirmation that economic growth has turned down. But in any case the implications are clear – retailers are in for a tough time ahead as consumers batten down the hatches.

The RBNZ has long been awaiting a significant slowing in consumer spending. As such, these survey results will come as something of a relief. Those looking for an early cut in interest rates are likely to be disappointed: at current levels, confidence is merely consistent with the much slower pace of consumer spending growth the RBNZ deems necessary to ward off inflationary pressure.

Thursday’s data showed that the annual current account deficit for the year to December 2007 was 7.9% of GDP. This is the smallest annual deficit since mid- 2005. The seasonally adjusted quarterly deficit fell from -$3.58bn in September to -$3.09bn. The improvement was due mostly to a whopping improvement in the trade balance (thanks to dairy and the Tui oil field), partly offset by small declines in the quarterly investment income balance and the services balance. Looking forward, the current account deficit must and will improve further. Some of the dairy boom is still to come through into export receipts, while the weaker housing market should result in slower consumption and borrowing growth. These factors are likely to outweigh the impact of a still-high NZD and steep oil prices.

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Published on  Mon, Mar 31 2008, 06:01 GMT