ASB Business Week Report 14/04/09
This week we focus on a fairly important economic variable that doesn’t get commented on much in these turbulent times: inflation. Friday sees the release of the Q1 CPI, which we expect will register a 0.4% quarterly increase and a 3.1% annual inflation rate.
Inflation is just as relevant in downturns as in the boom times. Inflation trends give a gauge on whether demand in the economy has been running high or low relative to the economy’s capacity to produce. Much of the focus falls on rising or high inflation. However, low inflation – or at least the expectation thereof – is a strong signal that the economy is running below its potential and needs boosting. Preventing deflation is just as critical as containing inflation – arguably more so as entrenched deflation is hard to get rid of. For that reason the inflation target has a floor as well, to spur the RBNZ to maintain a positive rate of inflation through easing monetary conditions to stimulate the economy.
Deflation is more of a risk for badly affected countries such as the US, UK and Ireland, and has afflicted Japan off and on for a number of years. It is far less of a risk for NZ, though we expect the RBNZ will be more focused in coming months of the risk that inflation falls too far for comfort.
In 2009 inflation will briefly dip to around 1%, the legacy of reversing last year’s petrol price spike. Over the next couple of years inflation is likely to sit in the bottom half of the 1% - 3% inflation target band. Watching non-tradable inflation will be the main gauge of how quickly the economic slowdown is impacting on inflation pressures. Resource constraints are slipping away at a dramatic pace, highlighting that the sustained contraction in the economy will filter through to inflation over time.
The message from last week’s Quarterly Survey of Business Opinion reinforced the likelihood that the economy will be weaker over 2009 than the RBNZ has been expecting, with businesses intending to cut back on investment expenditure and employment to a greater extent than reported in late 2008.
The RBNZ’s sharp economic recovery is predicated on monetary conditions being substantially looser than they are currently. Financial market developments and the QSBO results suggest to us the RBNZ should cut the OCR by 50bp on April 30, and we have also reverted to our previous expectation that a 2% end-point for the OCR is likely.
Inflation is just as relevant in downturns as in the boom times. Inflation trends give a gauge on whether demand in the economy has been running high or low relative to the economy’s capacity to produce. Much of the focus falls on rising or high inflation. However, low inflation – or at least the expectation thereof – is a strong signal that the economy is running below its potential and needs boosting. Preventing deflation is just as critical as containing inflation – arguably more so as entrenched deflation is hard to get rid of. For that reason the inflation target has a floor as well, to spur the RBNZ to maintain a positive rate of inflation through easing monetary conditions to stimulate the economy.
Deflation is more of a risk for badly affected countries such as the US, UK and Ireland, and has afflicted Japan off and on for a number of years. It is far less of a risk for NZ, though we expect the RBNZ will be more focused in coming months of the risk that inflation falls too far for comfort.
In 2009 inflation will briefly dip to around 1%, the legacy of reversing last year’s petrol price spike. Over the next couple of years inflation is likely to sit in the bottom half of the 1% - 3% inflation target band. Watching non-tradable inflation will be the main gauge of how quickly the economic slowdown is impacting on inflation pressures. Resource constraints are slipping away at a dramatic pace, highlighting that the sustained contraction in the economy will filter through to inflation over time.
The message from last week’s Quarterly Survey of Business Opinion reinforced the likelihood that the economy will be weaker over 2009 than the RBNZ has been expecting, with businesses intending to cut back on investment expenditure and employment to a greater extent than reported in late 2008.
The RBNZ’s sharp economic recovery is predicated on monetary conditions being substantially looser than they are currently. Financial market developments and the QSBO results suggest to us the RBNZ should cut the OCR by 50bp on April 30, and we have also reverted to our previous expectation that a 2% end-point for the OCR is likely.
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