MY PREDICTIONS FOR NZ'S 2014 ECONOMY
I know adults say Christmas is really for children but... this adult has never lost the pleasure and joy of Santa Claus. In that respect, Santa and his Elves have done all New Zealanders proud. They've delivered a Christmas full of economic momentum and that momentum has followed through into the New Year. Will it continue? What opportunities are out there for businesses and individuals? Although no one, including me has a crystal ball which delivers cast iron predictions, here's what I think…
The rebuilding of Christchurch, the very buoyant Auckland housing market, the positive migration into New Zealand, the upswing in our terms of trade, the strength of the labour market and the increased business and consumer confidence people are feeling, all make for a positive start to the 2014 Year. Long may it continue?
In addition to the redevelopment of Christchurch, Auckland will also see its fair share of housing construction occurring in an attempt to ease the housing shortage. The good news doesn't stop there. Wellington won't miss out as earthquake strengthening and water tightening will obviously begin in full earnest in our capital.
• Trades and Retailing
All this work is going to keep all those in the building and associated industries and trades busy this year. Of course, this will have a ripple out effect. Those providing supplies and components of all things that go into building, from engineering and architectural services to Gib board supplies to tapware provisions should happily be selling and it won't stop there. Retailers of home appliances and furnishing will also be in on the action. Retailers will be happy about this because they especially have suffered financially in past recent years. Despite these upbeat thoughts, keep an eye on expenses and inventory building especially.
• Infrastructure and Tourism
Building per se won't stop just with housing creation. The Government are on a real drive to make Auckland truly an international city by global standards and have given the go ahead for some considerable spending on upgrading infrastructure. Flow on effects will likely be felt in the tourism industry as we attract more travellers to our shores and in particular, into Auckland. Those in the accommodation and eatery sectors should be happy with this news.
All of this busyness is going to lead to more people being employed. Whilst that's good for our unemployment numbers, it will undoubtedly put a strain on some industries as the finding of "good people" becomes a harder and harder exercise to engage in. Remember, in the recession many of the people in the building trades headed off to Australia. Sure some of them may return but we are expecting this shortage of good people to lead to expected wage price increases. Price increases won't stop there. Materials and certain goods prices are also probably going to suffer a supply constraint, so expect these prices to increase as well. Word to the wise – ensure you have enough staff to see you through. Don't delay the hiring process or you may well find hiring good people as hard as finding hen's teeth.
There's good news on the dairy front too. Prices are high which drives interest in dairying. Consequently, we expect some investment spending to occur in converting to dairy and all the work that goes alongside this will need to be carried out such as irrigation and processing. Good news for those associated in these areas.
I'm in a couple of minds about this area. You see house prices are dictated to, by and large, through supply and demand factors. Short supply and long demand means one thing only – prices move upwards. On the basis that positive migration keeps occurring, there's going to be plenty of demand. So, for example in Auckland, in certain suburbs, for certain types of property, prices are expected to keep moving – yes it will still be a vendor's market. This is irrespective of the introduction of the Reserve Bank's (RB) new macro prudential tool and the banks consequential LVR requirements. For the most part, in the main city areas, this has had little effect. First home buyers simply get replaced by other types of purchasers. See my previous blog about the effect of LVRs on property ownership
for a fuller explanation of this.
In other parts of the country and in certain suburbs in Auckland, where supply is aplenty, demand is dampened, and the other four property fundamentals aren't working, I'd expect to see a cap, if not a decrease in house prices. A buyer's market will prevail. This is especially so when you take into account interest rates movements. More on this later.
The next question you should be considering is where to buy. Here's a tip - if you look at a city, there will be certain suburbs that have already experienced dramatic price increases in say the last 18 months. This frequently makes it harder to manage to purchase in those areas or not as an attractive economic proposition. If this applies to you, consider purchasing one or two suburbs out from the suburb that you actually want to purchase in. Identifying this suburb information is the key. I did this myself in 2013. Instead of buying in Remuera, I purchased a rental property in Meadowbank. Smart financial decision when it came down to rental income and expected capital gains over the long haul. Another tip is to bear in mind the time compass when purchasing realty.
• Interest Rates
It should come as no surprise to anyone who has an ear to the ground and an eye to the horizon that interest rates are expected to move. How big those movements are and when those movements will occur is anyone's guess. No one can accurately predict such things because of a host of factors, including overseas countries and respective economic behaviours.
What we do know is that the Reserve Bank (RBNZ) is tasked with keeping inflation in check and with an economy that is running hot, it will undoubtedly act to do just this. It will want to keep inflation down and avoid a blow out in our trade account balance. As a very basic 101 run through, the RBNZ reins in our demand for goods and services, including the demand for credit, through an increase in the Official Cash Rate (OCR). When the OCR increases, banks tend to increase their interest rates, thus we pay more for the money we borrow. Consequently, our appetite for credit decreases. This in turn means we have less funds to spend and so our long hands become short and our short pockets become long. In other words, we curtail the splurging of the moo la, hit the debt reduction scales and increase our piggy bank savings. Companies cut their inventory spend and "everything that isn't essential" spend, as they aren't moving as much of their product as they used to. The uptake of services isn't quite as high as it might have been and thus employment is cut. Overall, businesses spend less, individual consumers spend less and there is less money in circulation, all resulting in a fall back of inflation.
Given the above and where the economy is heading, interest rate hikes are expected. We already experienced a couple of these just before Christmas. Others are thought to possibly be occurring in March, with four to follow and carrying on right through and into 2015. Remember my caveat, however – no one has a crystal ball which delivers cast iron predictions. We live in a global world of continuing changing monetary policy and such changes can have effects even on little old New Zealand.
What I am confident of predicting, however, is that some people are going to get caught in this upward interest rate cycle. They will be under cash flowed, under capitalised and over exposed. They will have difficulty meeting everyday payments, including mortgage payments. Take heed – manage your interest rates by adopting a specific strategy and factor increases in rates into your expenditure calculations. Get ahead of the game and call our firm for assistance in this respect.
• Exchange Rates
On the basis that interest rates are on the upward move, its unlikely exchange rates are on the downward trend. In fact, there may well be some growth yet in the NZ dollar, especially so if loose offshore monetary policies rein. If you're in exporting or importing, it will be important (as it always is) to manage your currency risk. Get this sorted now.
Despite the positivism I've espoused, if we have our wits about us, we should learn from previous economic growth periods. Hopefully, we'll apply some financial common sense. We'll look back but won't stare. We'll turn our minds and actions to a solid growth future for the 2014 year but with a degree of firm planning implemented and optimistic constrain shown In my next blog I will ascertain the actions businesses and consumers should be applying to get ahead in this coming year.