Milford's Outlook for 2008
The 2008 year could be a tale of two halves. Economic and corporate news from the United States and New Zealand will be ugly through the first and second quarters but may start to improve as the year goes on. For the first half of 2008, financial news from the US is likely to be dominated by rising unemployment, continued problems in the residential housing sector, poor corporate earnings and massive write-offs from banks and other companies with exposure to the sub-prime mess. All this is likely to weigh on the consumer, in terms of their spending levels. A key issue is how deep the downturn will be in the US and whether it will have a substantial negative effect on the rest of the globe. The good news is that global growth is much more balanced compared with the last US recession in 2001. Moreover, significantly more growth in the Asian economies is being generated from internal demand rather than the previous heavy reliance on exports to the US. Japan now exports twice as much to the rest of Asia than it does to the US and as much to China alone as the US. Even so if US consumers put away their credit cards, then it is hard to believe that the Asian economies will not be materially impacted. After all the US is still about a quarter of the world’s total economy and US consumption is about 70% of the US economy. Thus the US consumer is ultimately responsible for about 1/6th of the world’s economy and a lot of related downstream related activity. So what the US consumer does still matters! Given these factors the first half of the year in the US is likely to see a very active Federal Reserve. With relatively high US interest rates it has some scope to cut rates. However, given inflationary pressures from high oil prices, a material US downturn is probably required before any significant further cuts can occur and this appears to be unfolding. This reinforces the tale of two halves with the likelihood that, ironically, bad news is required from the US economy before the good news of significantly lower interest rates perks investors up. New Zealand may see a similar pattern with a hawkish RBNZ requiring a run of bad news before contemplating any material easing in rates. We think this will occur with the trigger to be a significant residential housing down turn. The New Zealand sharemarket for the first half of the year will be struggling to deal with poor overseas financial news and NZ company earnings announcements, lower consumer confidence and spending, falling house prices and, possibly, rising unemployment. The flip side of this will be a possible lower Kiwi dollar, which will help exporters. However, the extent of the interest rate (and Kiwi dollar) falls will be mitigated by the RBNZ’s negative view on any fiscal stimulus from a Labour Government spend-up pre-election. Overall though, a combination of a less hawkish RBNZ and a free spending Labour Government should make things appear less bleak for New Zealand through the second half of the 2008 year.
Anthony Quirk, 18 January 2008
