Upturn weak amid debt aversion

OPINION: There is an upturn under way in the New Zealand economy but it would be wrong to describe it as strong, writes Tony Alexander this week.

Although dwelling sales for all of 2009 were up 24 per cent from 2008, in seasonally adjusted terms they fell by 10 per cent during the December quarter.

And although retail spending (after making the usual seasonal adjustments and taking out volatile components) improved at the fastest annualised rate in more than two years late last year, a lot of the growth was driven by hefty price discounting, special finance deals, and simply replacing worn-out stuff.

But perhaps the best way to get a feel for how the upturn is not proceeding along traditional lines and gaining lots of positive momentum is to look at the lending growth numbers.

In December, the level of household debt was only 2.7 per cent ahead of a year ago with growth averaging only 0.2 per cent a month. No acceleration in household borrowing is in evidence.

Businesses are saying in surveys that they feel confident about the coming year and their intentions of investing in new machinery are almost at average levels. But there is high awareness of the tightening of bank lending standards and the need to get debt levels down.

So at the end of last year business debt was 7.3 per cent lower than a year earlier. In the 2008 December quarter business debt grew $2.4 billion. In 2009 it shrank $2.7b.

Even farmers have finally stopped piling on more debt. Although farm debt rose 8 per cent last year it fell $315 million during the December quarter. Over the same period in 2008, farm debt grew $1.3b, in 2007 it grew $1.1b, and in 2006 $0.7b.

There is no evidence that businesses are acting on their high confidence by boosting capital spending.

At least for those businesses involved in this sort of activity there will be some offset from a strong hike in government infrastructure spending.

We are finding that willingness to take risks still appears quite low in the economy – and understandably so when one reads some of the worrying stories coming from overseas.

In China, banks have been told to cut lending and there are worries of a bubble having developed in the property sector. Government finances are in terrible shape in the likes of Portugal, Ireland, Iceland, Greece and Spain.

In the United States and Britain, government deficits are huge, there are worries about the US housing market reversing again after bouncing off the bottom, and there is uncertainty about the extent to which tightened banking policies overseas will affect credit flows. This year is likely to be one in which growth reaches around 3 per cent but along the way we should expect to see some possibly quite deep periods of concern about the world.

Exporters might want to give thought to taking advantage of these weak sentiment periods to put in place some extra currency hedging because high risk aversion correlates with New Zealand dollar weakness.

We still expect the kiwi to hit US80 cents some time later this year once monetary policy kicks off – probably in June.

» Tony Alexander is the chief economist for the Bank of New Zealand.

- © Fairfax NZ News

Newest First

Oldest First