The New Zealand economy contracted by 0.4 percent in the September quarter, continuing a three-quarter long recession thus far. Real GDP growth for the year ended September was 1.7 percent. The recession is the country's worst in 10 years, the last being associated with the Asian financial crisis of 1997.
Yesterday, Statistics New Zealand reported that the country's current account deficit (the trade balance on international goods and services) swelled to 8.6 percent of GDP.
Showing posts with label Economy. Show all posts
Showing posts with label Economy. Show all posts
Monday, December 22, 2008
Tuesday, November 25, 2008
OECD Forecasts for New Zealand Economy - November 2008
The OECD released its latest Economic Outlook, no 84 on 25 November 2008 which included the following summary of its economic forecasts for New Zealand:
"New Zealand has entered recession ahead of other OECD countries, a victim of simultaneous domestic and foreign shocks. The outlook remains subdued because the large macroeconomic imbalances built up over the past decade -- inflation, housing overvaluation, high household debt and a huge current account deficit -- will take some time to unwind.
Macroeconomic policies are in a good position to cushion the downturn. Tight monetary policy, in place for some time, is now being eased at a rapid pace, and a fiscal expansion is starting from a point of significant surplus and low debt. It will be important to maintain the strong inflation targeting and fiscal sustainability frameworks and to facilitate the shift of resources to the tradeables sector."
The OECD's GDP forecasts for New Zealand were cut by a third to 0.5 percent for the calendar year 2008 and from 2.1 percent to 0.8 percent in 2009 from the previous round of forecasts. Only a small improvement to 1.9 percent growth is expected in 2010.
Inflation that hit 5.1 percent in the September quarter is projected to fall away to 2.3 percent by the end of 2009.
But the deflation beginning to grip the world economy will see a widening of the current account deficit to 9.5 percent of GDP by the end of 2008 with only a small improvement to a deficit of 7.6 percent of GDP in 2009. Unemployment is forecast to reach 5.4 percent by the end of 2009 and 6.0 percent in 2010.
On the plus side, New Zealand's macroeconomic policy settings have positioned the country to absorb the economic shock better than when it entered previous cyclical downturns. The low public debt as a percent of GDP, currently around 17% of GDP, provides a fiscal cushion and permits more room for a larger fiscal expansion than the new National government is likely to contemplate, but circumstances could change that stance.
Where policy settings could be criticised is in the area of monetary policy where the ill-conceived single-minded focus on inflation targeting has blinded the Reserve Bank somewhat to the need for a faster and more expansionary monetary stance. That said, it is to the country's benefit that a more enlightened Governor, Alan Bollard, is at the helm rather than his more ideologically-blinkered predecessor, Don Brash.
Like the official New Zealand economic forecasts released in the last month or two, the OECD forecasts likely underestimate the gravity of the economic situation facing both New Zealand and the world economy. The unwinding of the debt crisis in the US and its ripple impact on the rest of the world will likely take longer and involve a steeper plunge in economic activity than these sets of forecasts indicate.
The track record of economic forecasting is that forecasters are notoriously bad at picking the timing of economic downturns but even worse at estimating how deep the economic decline is in severe downturns.
US economic commentators are picking the current recession to be as bad as the W-shaped recession of the early 1980s - essentially 2 recessions, 2 VVs make a W! - but the structural change being wrought through the financial sector in many economies is more likely to result in an recession more like the magnitude of 1973-1975.
[Personal note - this is not a kuaka (godwit) twittering away, but the analysis of a macroeconomist who studies the business cycle. And, if I may be immodest, who warned in an economics article in the mid 1990s of the grave danger of the derivatives market causing a systemic collapse of the financial and real sectors resulting in international financial instability. Small good that did the world!]
"New Zealand has entered recession ahead of other OECD countries, a victim of simultaneous domestic and foreign shocks. The outlook remains subdued because the large macroeconomic imbalances built up over the past decade -- inflation, housing overvaluation, high household debt and a huge current account deficit -- will take some time to unwind.
Macroeconomic policies are in a good position to cushion the downturn. Tight monetary policy, in place for some time, is now being eased at a rapid pace, and a fiscal expansion is starting from a point of significant surplus and low debt. It will be important to maintain the strong inflation targeting and fiscal sustainability frameworks and to facilitate the shift of resources to the tradeables sector."
The OECD's GDP forecasts for New Zealand were cut by a third to 0.5 percent for the calendar year 2008 and from 2.1 percent to 0.8 percent in 2009 from the previous round of forecasts. Only a small improvement to 1.9 percent growth is expected in 2010.
Inflation that hit 5.1 percent in the September quarter is projected to fall away to 2.3 percent by the end of 2009.
But the deflation beginning to grip the world economy will see a widening of the current account deficit to 9.5 percent of GDP by the end of 2008 with only a small improvement to a deficit of 7.6 percent of GDP in 2009. Unemployment is forecast to reach 5.4 percent by the end of 2009 and 6.0 percent in 2010.
On the plus side, New Zealand's macroeconomic policy settings have positioned the country to absorb the economic shock better than when it entered previous cyclical downturns. The low public debt as a percent of GDP, currently around 17% of GDP, provides a fiscal cushion and permits more room for a larger fiscal expansion than the new National government is likely to contemplate, but circumstances could change that stance.
Where policy settings could be criticised is in the area of monetary policy where the ill-conceived single-minded focus on inflation targeting has blinded the Reserve Bank somewhat to the need for a faster and more expansionary monetary stance. That said, it is to the country's benefit that a more enlightened Governor, Alan Bollard, is at the helm rather than his more ideologically-blinkered predecessor, Don Brash.
Like the official New Zealand economic forecasts released in the last month or two, the OECD forecasts likely underestimate the gravity of the economic situation facing both New Zealand and the world economy. The unwinding of the debt crisis in the US and its ripple impact on the rest of the world will likely take longer and involve a steeper plunge in economic activity than these sets of forecasts indicate.
The track record of economic forecasting is that forecasters are notoriously bad at picking the timing of economic downturns but even worse at estimating how deep the economic decline is in severe downturns.
US economic commentators are picking the current recession to be as bad as the W-shaped recession of the early 1980s - essentially 2 recessions, 2 VVs make a W! - but the structural change being wrought through the financial sector in many economies is more likely to result in an recession more like the magnitude of 1973-1975.
[Personal note - this is not a kuaka (godwit) twittering away, but the analysis of a macroeconomist who studies the business cycle. And, if I may be immodest, who warned in an economics article in the mid 1990s of the grave danger of the derivatives market causing a systemic collapse of the financial and real sectors resulting in international financial instability. Small good that did the world!]
Wednesday, November 19, 2008
Air New Zealand Cuts 200 Jobs
Reflecting weakening international demand, Air New Zealand has announced 200 layoffs from its 11,500 work force. Half the layoffs are from international cabin crew with the balance being in non-shop floor engineering and head off staff. Labour cost savings are estimated at NZ$20 million per year.
The airline has already cut long haul capacity to the United Kingdom, China, and Japan by 8 percent and expects the reduction to reach 13 percent by June 2009.
Last week Air New Zealand said it was not cutting domestic flights for now as demand on the main trunk and Queenstown routes remained good.
Qantas airlines, however, has announced it will cut in its flights within New Zealand by 25 percent by late January and it is not restoring its Wellington-Christchurch flight. Aviation industry commentators suggest that while Qantas is winding down flights, its budget fare subsidiary, Jetstar will step into the breech to fill some of the flights. Jetstar as applied for an operation certificate from New Zealand"s Civil Aviation Authority.
Should Jetstar step into the NZ domestic market, Air New Zealand will have to adapt its domestic business strategy to meet the new competition. Air New Zealand's budget fare subsidiary, Freedom Air, was shutdown earlier this year having seen off a previous round of competition since 1996.
The airline has already cut long haul capacity to the United Kingdom, China, and Japan by 8 percent and expects the reduction to reach 13 percent by June 2009.
Last week Air New Zealand said it was not cutting domestic flights for now as demand on the main trunk and Queenstown routes remained good.
Qantas airlines, however, has announced it will cut in its flights within New Zealand by 25 percent by late January and it is not restoring its Wellington-Christchurch flight. Aviation industry commentators suggest that while Qantas is winding down flights, its budget fare subsidiary, Jetstar will step into the breech to fill some of the flights. Jetstar as applied for an operation certificate from New Zealand"s Civil Aviation Authority.
Should Jetstar step into the NZ domestic market, Air New Zealand will have to adapt its domestic business strategy to meet the new competition. Air New Zealand's budget fare subsidiary, Freedom Air, was shutdown earlier this year having seen off a previous round of competition since 1996.
Thursday, October 23, 2008
Negative Equity in New Zealand Homes Rises
The Press reports that Chris Eves, Professor of Property Studies at Lincoln University, estimates that more than 130,000 households may have dipped into negative equity as property values drop below mortgage amounts owed on the property.
The problem is of greatest consequence for homeowners who hold mortgages amounting to 80 per cent of the value of a home. As economic activity stalls, an increasing number of households experiencing negative equity will find it increasingly difficult to meet mortgage payments and risk a mortgagee sale (foreclosure).
Median prices nationwide have dropped nearly 6 percent in the year ending September 2008, according to the Real Estate Institute of New Zealand, but larger declines may be expected as the recession bites harder in the year ahead. Some forecasts suggest a further 20 percent drop in property values.
Real Estate Institute of New Zealand
The problem is of greatest consequence for homeowners who hold mortgages amounting to 80 per cent of the value of a home. As economic activity stalls, an increasing number of households experiencing negative equity will find it increasingly difficult to meet mortgage payments and risk a mortgagee sale (foreclosure).
Median prices nationwide have dropped nearly 6 percent in the year ending September 2008, according to the Real Estate Institute of New Zealand, but larger declines may be expected as the recession bites harder in the year ahead. Some forecasts suggest a further 20 percent drop in property values.
Real Estate Institute of New Zealand
Wednesday, October 22, 2008
Reserve Bank Chops OCR Interest Rate by Full 1 Percent
Comparative Central Bank Interest Rates - New Zealand, Australia, United States
Fairfax Media
Reserve Bank Governor, Alan Bollard, has chopped the Official Cash Rate by a full one percent to 6.5 percent in his October review of monetary conditions. It was the single largest cut in the rate since the OCR was introduced in 1999. The OCR is the rate at which the Reserve Bank lends to or borrows from the NZ banking system.
With the increasing impact of the global economic crisis showing up in New Zealand's domestic recession in the form of weakening export demand, the Reserve Bank's hand was forced into a large cut. Market sentiment is that a further 0.75 percent can be expected in the next few months.
Domestically, the weakening of the housing market, tightening credit, a decline in Fonterra's payout to dairy farmers next year, and increasing unemployment are combining to shift the Reserve Bank's concern to offsetting weakening demand from inflation control as price increases are moderating.
Thursday, September 25, 2008
New Zealand Economy Officially in Recession
The New Zealand economy officially entered recession in the June quarter 2008 according to GDP data released by Statistics New Zealand today.
Expenditure on GDP dropped by almost 1.2 percent over the first half of 2008, with consumer spending dropping by nearly 0.7 percent over the same period, reflecting weakening household expenditures in the face of lower consumer confidence in general economic conditions. Slowing retail sales and a contraction in investment spending in housing is resulting in an inventory build-up that indicates businesses at the manufacturing and distribution levels are beginning to hold excess stocks that retailers are unable to sell.
In the trade sector, exports of goods and services fell 2.1 percent over the past six months as a high Kiwi dollar & interest rates combined with weakening international demand. The biggest reduction in export volumes came from dairy products that had expanded rapidly in recent years as part of a commodity boom. Reflecting the lag that typically takes place as the economy enters a recession, imports continued to surge by nearly 4.7 percent as domestic consumption fell. Strong demand for capital goods by businesses also contributed to the strong growth in imports.
New Zealand last experienced a recession with three quarters of real GDP decline in 1998.
Economists are now revising their forecasts for September quarter GDP downwards as the June quarter GDP tracks lower than previous estimates.
Since July, the Reserve Bank has cut official interest rates from 8.75 to 7.0 percent in two steps. Now analysts are expecting a further 0.5 percent cut at the Bank's next interest rate review late next month with rates down to 6.5 percent by early 2009.
Tempering the Bank's softening of monetary conditions is the risk of accelerating inflation that at least one commentator considers (somewhat exaggeratedly) to be "rampant" at 4 percent.
Expenditure on GDP dropped by almost 1.2 percent over the first half of 2008, with consumer spending dropping by nearly 0.7 percent over the same period, reflecting weakening household expenditures in the face of lower consumer confidence in general economic conditions. Slowing retail sales and a contraction in investment spending in housing is resulting in an inventory build-up that indicates businesses at the manufacturing and distribution levels are beginning to hold excess stocks that retailers are unable to sell.
In the trade sector, exports of goods and services fell 2.1 percent over the past six months as a high Kiwi dollar & interest rates combined with weakening international demand. The biggest reduction in export volumes came from dairy products that had expanded rapidly in recent years as part of a commodity boom. Reflecting the lag that typically takes place as the economy enters a recession, imports continued to surge by nearly 4.7 percent as domestic consumption fell. Strong demand for capital goods by businesses also contributed to the strong growth in imports.
New Zealand last experienced a recession with three quarters of real GDP decline in 1998.
Economists are now revising their forecasts for September quarter GDP downwards as the June quarter GDP tracks lower than previous estimates.
Since July, the Reserve Bank has cut official interest rates from 8.75 to 7.0 percent in two steps. Now analysts are expecting a further 0.5 percent cut at the Bank's next interest rate review late next month with rates down to 6.5 percent by early 2009.
Tempering the Bank's softening of monetary conditions is the risk of accelerating inflation that at least one commentator considers (somewhat exaggeratedly) to be "rampant" at 4 percent.
Wednesday, September 10, 2008
Reserve Bank Chops OCR by 0.5 percent in 2nd Rate Cut
The Reserve Bank slashed the Official Cash Rate, its lending rate, 50 basis points - twice as much as expected by financial analysts - in its second rate cut in around six weeks. The cumulative rate reduction is now 0.75 percent. See press statement here. The September Monetary Policy Statement released at the same time may be found here.
With its primary policy responsibility as set out in the Policy Targets Agreement (PTA) as the requirement to keep inflation within the 1-3 percent range in the medium term, the Bank predicts that the "marked slowdown, led primarily by the household sector" will result in "lower inflation pressures in the medium term". An easing in world oil prices is probably likely to more than offset the depreciation of the Kiwi dollar that is taking place in recent weeks as the US dollar regains some strength.
The Reserve Bank points to tightening credit conditions within New Zealand impacting households and business as grounds for bringing forward its easing of monetary conditions. No doubt the Bank is mindful of the chronic financial stress in some parts of the financial sector (see yesterday's post) and the real estate market, and the high debt burden of the household sector that in the absence of monetary easing might precipitate an accelerated rate of foreclosures and personal bankruptcies. After years of low domestic saving rates and a consumption binge, "tomorrow" has arrived and the chips are falling where they may.
Edgy times at the Bank.
While this blog concluded back in late July that "A half-point cut, and some months ago, might have been more in order given the increasing gravity of the financial instability and weakening macroeconomic conditions", we are under no illusions that Governor Alan Bollard reads our scribblings. Still, we are pleased that through ESP or analysis moving in parallel he has reached the same conclusion albeit a bit later in the piece!
With its primary policy responsibility as set out in the Policy Targets Agreement (PTA) as the requirement to keep inflation within the 1-3 percent range in the medium term, the Bank predicts that the "marked slowdown, led primarily by the household sector" will result in "lower inflation pressures in the medium term". An easing in world oil prices is probably likely to more than offset the depreciation of the Kiwi dollar that is taking place in recent weeks as the US dollar regains some strength.
The Reserve Bank points to tightening credit conditions within New Zealand impacting households and business as grounds for bringing forward its easing of monetary conditions. No doubt the Bank is mindful of the chronic financial stress in some parts of the financial sector (see yesterday's post) and the real estate market, and the high debt burden of the household sector that in the absence of monetary easing might precipitate an accelerated rate of foreclosures and personal bankruptcies. After years of low domestic saving rates and a consumption binge, "tomorrow" has arrived and the chips are falling where they may.
Edgy times at the Bank.
While this blog concluded back in late July that "A half-point cut, and some months ago, might have been more in order given the increasing gravity of the financial instability and weakening macroeconomic conditions", we are under no illusions that Governor Alan Bollard reads our scribblings. Still, we are pleased that through ESP or analysis moving in parallel he has reached the same conclusion albeit a bit later in the piece!
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