BNZ Weekly Overview and Offshore Overview

Welcome to the July 10 2008 editions of the BNZ Weekly Overview and Offshore Overview.

Many thanks to those people who contributed to our monthly survey.  The results show a deterioration in expectations for the economy over the next 12 months consistent with the results of the long-running Quarterly Survey of Business Opinion from the NZIER. Businesses plan laying people off and cutting back on spending and have the worst outlook for their profitability and activity levels in 25 years.

Domestically there are unfortunately no bright shining lights on the horizon suggesting the crunch in the household sector will ease soon.  In fact greater labour market weakness may lay ahead as the business sector now undergoes its own rationalisation.  And offshore conditions have deteriorated quite strongly over the past fortnight with sharemarkets declining and the international credit crisis getting a lot worse with rumours about more huge losses to be reported by United States financial institutions and a potential bailout being needed for one or both of the major mortgage finance houses over there.

The eventual upturn in growth in the New Zealand economy will come out of the export sector and although dairying is very strong prospects for tourism look quite worrying given the increase in international airfares and decreasing capacity, and as yet we have not seen the Kiwi dollar undergo a substantial decline against most currencies. Against most currencies today the NZD is broadly where it was a week ago.

Next week the country's inflation rate for the June quarter will be released and we are expecting a lift to just below 4% from 3.4% at the moment. In a fortnight the Reserve Bank will review monetary policy and although we think they will reinforce their comment about cutting interest rates before the end of the year the chances just favour them hanging off to September before reducing the official cash rate.

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