Market sentiment has soured over recent weeks, as the European Sovereign debt crisis once again returned to stormy
waters. The failure of elected Greek politicians to form a government means there will now be another election in mid-
While no-one knows for sure whether Greece will remain in the Euro or if another solution will be found, what is more certain is the likelihood of ongoing volatility in markets for the foreseeable future as European politicians and bureaucrats play hardball with each other trying to achieve their own most favoured outcomes.
Amidst all the uncertainty on the international front, the key drivers of domestic economic growth are clearly shifting. Activity in the construction sector is starting to accelerate; building consents jumped a whopping 20 per cent in March.
Meanwhile export conditions are deteriorating. Export commodity prices are down almost 15 per cent from their peaks and growth in Asia has clearly slowed. While we expect this is a cyclical, not permanent, downward shift in commodity prices, we also suspect they have not quite seen the trough yet. Commodity prices are likely fall further over the next few months before stabilising and starting to improve again late in 2012.
The Reserve Bank of New Zealand (RBNZ) struck an even softer tone in the April Official Cash Rate (OCR) review,
making no reference to the next move in interest rates being up. It even tabled the possibility of a lower OCR by saying
''should the exchange rate remain strong without anything else changing, the Bank would need to reassess the outlook for monetary policy settings''.
Since then conditions have changed, the New Zealand dollar (NZD) has fallen sharply. On its own, we think this has made RBNZ more comfortable and reduced the likelihood of OCR cuts. We continue to expect the next move in
interest rates to be up, though not until March. Markets, however, view OCR cuts more likely than economists.
The NZD plunged during May, as renewed fears about a messy Euro-zone break up and falling commodity prices came to the fore. While the speed of the correction has been swift, fundamentally neither falling commodity prices nor the
falling dollar were a major surprise. We've long anticipated lower commodity prices on the back of the ongoing slowdown in growth in China and developing Asia, for which the European situation can probably take some small credit, which in turn has slowed demand for commodities. Where commodity prices go, the NZD tends to follow.
The rural land market has gradually improved in the first few months of 2012 with both prices and volumes drifting higher. However, there was a noticeable pullback in the volume of farm sales in April. With commodity prices falling, we
wouldn't be surprised to see renewed caution in rural property markets despite interest rates remaining low.
Dairy prices have tumbled in recent weeks as strong supply growth has collided with softer demand growth in key Asian economies. However, we don't expect either of these factors to continue indefinitely. Weather conditions and pasture
growth are likely to return to more 'normal' levels in New Zealand. With growth in China forecast to pick up again toward the end of the year, dairy prices are likely to improve by late 2012.
International wool prices weakened in recent weeks as the European debt crisis weighs on European consumers. With
many of the woollen goods sold in Europe manufactured in China, soft demand is weighing on Chinese demand for wool imports. While prices are likely to fall further in the near term, global wool supplies remain relatively tight.
Beef prices have been more resilient than other export prices in recent months, largely on the back of tight global supplies. Lamb prices are very exposed to European developments and fell significantly in recent months as tight global supplies were outweighed by fragile domestic demand conditions in the Eurozone.