On Wednesday, Dec. 8, the Reserve Bank of New Zealand will announce its latest interest rate decision. At first glance, it might appear that a small rate hike is in order, considering the country’s rising costs of living. But dig a bit deeper, and the overwhelming likelihood is that the bank will not change rates at all – placing a lot of short-term selling pressure on the New Zealand dollar (NZD).
It’s a shocking turn of events for a country that enjoyed a nice rebound. After contracting by an average of about 0.4% a quarter, the Pacific economy enjoyed an average of 0.5% gain over the last 12 months. But the recovery isn’t expanding fast enough. In fact, it’s quite the opposite – it has been slowly contracting since the middle of this year.
A big part of the problem is consumer spending. On paper, sales were strong last quarter, despite the country’s high unemployment rate – 6.4% heading into the fourth quarter. But it turns out the boost in spending wasn’t triggered by optimistic shoppers. Instead, it was a reaction to something that stands to take a big bite out of future retail sales: an increase in the goods and services tax (GST).
New Zealand’s GST – a fancy way to say “sales tax” – recently jumped from 12.5% to 15%. So retail sales surged as consumers stocked up on things at lower prices. Without the surge, retail spending may have been flat to negative for the last three months.
Meanwhile, in another sign of trouble, building consents (new housing authorizations) have dropped by 20% since the first quarter. This is a big deal because, as in the United States, new homes are an important spending generator.
Needless to say, the lackluster sales have helped keep New Zealand’s inflation in check. Consumer prices have remained well below the Reserve Bank of New Zealand’s benchmark target of 2-3%. In fact, the overall inflation has increased by only 1.6%.
The numbers aren’t suggestive of deflation, and they do indicate a rising cost of living. But just barely – overall, they aren’t inflationary. With prices at below target levels, there is no justification for higher interest rates in the short term.
Weak manufacturing isn’t helping the case for higher rates, either.
For three straight months, the New Zealand manufacturing sector has shown nothing but contraction. According to the country’s manufacturing index published last month, factories saw little growth in new orders and delivered goods. At the same time, the monthly production index dropped to a reading of 49.7. Anything below a reading of 50 is considered a contraction.
This means that companies are completing current product projects but have little in the pipeline for the sector’s future growth.
A quick look at the country’s two trade partners shows why. New Zealand’s export market is primarily driven by trade with Australia and the United States. Combined, the economies are responsible for over one-third of New Zealand’s exports. And with both economies in a slowdown, you can bet that the country’s manufacturing sector will continue to remain in the doldrums.
Put it all together, and the short-term future of the kiwi dollar looks grim. Softer economic times in New Zealand. Low rates of inflation. Stable to low manufacturing growth. Add on a sidelined Reserve Bank of New Zealand, and it’s making the case for a weaker New Zealand dollar exchange rate even more realistic.
Don’t Bet on New Zealand’s Recovery originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”
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