By Alex Tarrant
The Reserve Bank has presented a glum outlook for New Zealand if Greece or other countries leave the euro, and is set to cut the Official Cash Rate from 2.50% to help offset the effects.
Even if the euro area stays intact, the Bank warned in its June Monetary Policy Statement that economic conditions in Europe could turn out markedly worse than in its central projection.
While New Zealand’s direct trade link with Europe was relatively small – the euro area accounted for 7% of New Zealand exports – the size of the European economy as a proportion of the global economy meant a deterioration there would have a severe impact on the rest of the world.
The euro currency area accounted for about 14% of global GDP, adjusted for purchasing power, while the European Union as a whole accounted for a fifth.
“In particular, European countries are a significant export destination for China and South-East Asia. A more marked slowdown in Europe would result in much weaker exports from Asia,” the Reserve Bank said.
“Recent experience from the global financial crisis suggests that the effects of an inventory cycle on industrial production in these countries can be large,” it said.
This would consequently reduce imports by these countries from New Zealand and Australia.
“Asian economies and Australia combined account for about two thirds of New Zealand’s exports. Hence the major impact of a sharp downturn in euro-area activity on New Zealand’s exports will be via the indirect effect on New Zealand’s other trading partners,” the Reserve Bank said.
A major downturn in the euro-area would put downward pressure on commodity prices.
“Given the preponderance of commodities in New Zealand’s export basket, such a fall in commodity prices could result in a large reduction in the terms of trade, reducing national income,” the Reserve Bank said.
In the past, sharp declines in world growth had been matched by falls in the New Zealand dollar. However, while this helped to cushion exporter incomes from the reduction in world prices, depreciation in the currency would impact some cost on the rest of the economy.
“A lower TWI would increase import prices, making investment more expensive for firms and increasing the cost of imported consumer goods, generating tradable inflation,” the Reserve Bank said.
Default by Greece or other European borrowers could also cause bank failures across Europe.
Funding costs
“International funding markets could become prohibitively expensive, which would boost New Zealand lending rates and potentially reduce the amount New Zealand banks would be willing to lend,” the Reserve Bank said.
“For a given level of inflationary pressure in the economy, 90-day interest rates would have to be correspondingly lower to offset the effects of these higher funding costs,” it said.
European banks were also involved in trade finance in Asia. Significant losses in their home markets would likely bring about a reduction in trade finance activity, which would further impinge on Asian exports.
The worsening situation in Europe was also likely to affect New Zealand confidence, like after the bankruptcy of Lehman Brothers in 2008.
“The consequent decline in economic activity was faster and sharper than pure trade flows justified. A similar reaction would be expected to an unplanned European default, with firms reducing investment and households reining back expenditure,” the Reserve Bank said.
“Overall, one or more countries leaving the euro area, or a disorderly major default, could significantly reduce inflationary pressures in the New Zealand economy,” it said.
“This would be expected to result in materially weaker monetary conditions in New Zealand.”
8 Comments
Reminds me of a tsunami warning. "One could be coming, and it would be fairly devastating; but I have no plan to deal with it. So let's just wait on the shore and see."
On some of his specific points; since the GFC- surely a time of limited world economic growth, our exchange rate has not declined- it's appreciated by 20%, entirely because of the money printing and active exchange rate management of most key players. Bollard has actively encouraged this appreciation, despite its damage to our comptitiveness. He has let the newly minted foreign money flow in supporting our economy in the short term, but at the expense of the ownership of anything, continued massive foreign debts, and an increasing coist burden in paying for the debt or non ownership indefinitely.
On the solutions, rather than just watch the local money dry up; or for us to have to pay foreign banks yet more bilions in trading costs, we can print our own money; and charge whatever we want for it that makes sense to the local economy. The Current Account is always a very good measure then of whether we are too loose or too tight; not whether inflation per se is above 2 or 3%.
In this report Bollard is somewhat silent on whether he would allow the increase in tradeable inflation as he calls it (as he should in my opinion, it being a necessary price signal adjustment from imports to local production and services); or whether he would kneecap the economy yet again by focussing entirely on the overall inflation score. He is now of course a lame duck, so I guess his opinion doesn't really matter much any more anyway. Hopefully the replacement will have a more enlightened view.
..... the weird thing is , one particular Eurozone country on its own has the resources to prop up & bail out the entire mess ...... one country which has profited mightily from it's Eurozone partners , and which has benefited by exporting hand-over-fist due to the low Euro rate , compared to if it had it's own currency back again .....
It's time to expel Germany from the EU & the Eurozone !
We can all see the RBNZ has an extremely difficult task, but it begs the question .... Why the hell is the RBNZ as overseer of Monetray Policy, not working in tandem with the Fiscal Authorties to actively seek a weakening of the NZ$ ?
Currently , our exporters could be doing better , exports are tipped to fall due to the strong NZ$ . The effect of the strong dollar is good for consumers , but not good for producers, because our domestic manufactruring sector cannot compete, and is getting gutted.
Instead of front footing the problem , and managing those things that are within our control , we sit back and wait for something unpleasant to happen.
They cant say afterwards : " Ah .... we didnt see it coming", becasue this outlook by the Reserve Bank is a very real propsect .
Simply because Boatman the RBNZ are in cahoots with the banks and US FED. They only make profits from...........increasing DEBT.
Bollard made it quite clear sometime ago who he will protect at ANY cost and that is consumers, in particular mortgage holders, thus this protects banks and keeps THEIR assets (not the homeowners as the bank owns it all until the debt paid in full + interest) from going into devaluation freefall which would stop the debt gravytrain. Hence global bank bailouts.
They don't care about savers, exporters, LEGITIMATE businesses, they don' care! All they want to do is save their and the banks asses fore it is the global elite right up to the very Queen of England who they are protecting.
This might interest you also: The real monetary system in action in regards to NZ credit swaps between the RBNZ and US FED
“For a given level of inflationary pressure in the economy, 90-day interest rates would have to be correspondingly lower to offset the effects of these higher funding costs,” it said.
There u go... he said it... In the name of "liquidity"... the reserve bank is prepared to burn and plunder any savers that are still left....
The Reserve Bank, whos' main reason for existence is to ensure price stability, ...will turn a blind eye...
This whole idea of "rebalancing" our economy.... was just blowhard ...empty rhetoric.
The powers that be are only interested in perpetuating the status quo..
Whats that iconic Blam blam blam song... " There is no Leadership in New Zealand"... :)
Roelof - how else are the entitled to extract tribute.
As noted in another thread the tools of revolution need to be prepared.
Lifetimes worth of savings are about to be plundered for a few and yet their individual gains are in reality too puny to warrant putting the majority at risk.
Those who think they are in charge are foolhardy in the extreme, thus the countermeasures have to be more than equal to the task.
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