Recent New Zealand economic data suggests the economy continues to build positive momentum despite the GDP number for Q1 2013 disappointing expectations. The summer drought had a negative impact on GDP but was offset somewhat by strong construction growth. Forward looking data gives the impression of a solid base of momentum forming for the domestic economy.  The recent ANZ Business Outlook survey, which showed business sentiment rising from an already elevated level points to strong prospects for the economy, particularly over the next 6 months. The PMI manufacturing index lifted to its strongest level since 2004.  Also building consent issuance and house prices continue to trend higher as NZ’s population growth is now increasing again as fewer New Zealanders depart to Australia.

The current acceleration in economic activity will eventually lead to interest rates increasing, but for the near term, consumer prices do not appear to be an inflational problem. The RBNZ left interest rates unchanged at its last meeting and continued to signal that it expects to maintain the current interest rate settings through to at least the end of the year and specifically commented that “Higher interest rates are not the right policy response (to the strong housing market) at this time”. A higher overnight cash rate (OCR) would be unwelcome presently as it would lead to a stronger NZD.

Whilst the economic data is continuing to improve, recent company comments have a cautious tone, in part due to New Zealand’s recent climatic patterns. The retail sector benefitted from warm, dry weather conditions through the long Summer but the delayed start to Winter has negatively impacted trading as many retailers have been caught out of season, with new Winter stock and warm weather. To some extent this also has affected Freightways as softer retail volumes over the past few months has impacted Post Haste and Castle Parcel brands.

The positive outlook for NZ’s economy suggests that earnings expectations for companies may start to improve over the next six months and the market may be near a turning point in the cycle. This is positively backed up somewhat by profit expectations in recent economic data.

Mark Warminger

Portfolio Manager