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The highly anticipated Financial stability report (FSR), which is released by the RBNZ once every six months, is going to provide a comprehensive analysis of the current condition of the New Zealand's economy. Because of its infrequent releases and the exhaustive scope of statistical data that it covers, the FSR typically causes a lot of volatility in the capital markets as investors get a sense of the longer-term projections for the Kiwi economy.
The last FSR, which was released on the 28th of November 2018, had an overall hawkish tone; however, it expressed concerns for the state of the international debt markets.
“New Zealand’s financial system risks have eased, but remain high. Slower mortgage lending growth and house price inflation have reduced risk” [source]
There are, however, strong indications to expect a more dovish FSR this Tuesday, as the financial conditions both locally and internationally have generally worsened since November of last year. Firstly, the housing market in New Zealand remains fragile and local homeowners are exposed to sudden shocks in the housing prices. In the previous report, it was alluded to the possibility of a burst in the housing market because of the high debt levels.
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The graph shows the sudden surge in household prices throughout the first two months of 2019, just below 3%, which measures a significant increase compared to the 0.5% at the time of the last report. Presently, the growth in household prices is exceeding RBNZ's initial forecasts, which is a point of concern given their previous statement:
“We think house price growth will remain low for some time. […] The longer that house process grow slowly, the less likely it is that they will fall sharply in the future”
Because of these sizable hikes in household prices, the risk of a debt bubble bursting in New Zealand is somewhat more likely now than in November, and this should be a pivotal point in the new FSR on Tuesday.
Secondly, the renewed escalating global tensions are once again having a hampering effect on international trade, which is conversely damaging the international debt markets and thus increases the possibility of global shocks.
Recently, the global economy has been on a slow path of economic recovery, and the steady growth rates have somewhat diffused the accumulating global debt, however, it remains vulnerable to sudden distortions, such as the one outlined above, which could lead to a new recession. For as long as the global growth manages to outpace the steady rising debt, the risk of such credit crunches should be managed, but there are some concerns that global debt is accumulating faster than previously thought.
On Wednesday of last week, the US Treasury Secretary Steven Mnuchin warned the House Financial Services Committee of the possibility of Government default on US debt towards the end of the summer period, unless the debt ceiling is lifted [source].
These warning signs from the world’s largest economy worry investors that trade woes with China could potentially incite a global economic selloff, and future hikes of the debt ceiling, which is more of a remedy policy rather than an actual resolution, would not be enough to prevent such slumps in economic activity.
Either way, the release of the Financial Stability Report in early Tuesday morning is set to trigger a lot of market volatility in the foreign exchange, and the New Zealand Dollar is expected to react.
Image source: Trendsharks ©, created with TradingView.com
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