By Alex Tarrant
New Reserve Bank Governor Graeme Wheeler should cut the Official Cash Rate from its record low 2.5% on October 25, Business NZ says.
The call comes as market participants are almost fully pricing in a 25 basis point cut in the OCR to 2.25% sometime in the year ahead. See more here on our site from BNZ economists.
New Zealand bank economists have been pushing out their expectations for when the Reserve Bank will next move on the OCR - they're still expecting the next move to be a hike - from mid-2013 to the end of the year, or even into 2014.
Radio NZ reported this morning Business NZ CEO Phil O'Reilly calling for the cut after the Reserve Bank of Australia cut its benchmark rate by 25 basis points to 3.25% on Tuesday. The RBA cut weakened the Australian dollar, boosting the New Zealand dollar to a one-year high above 80 Australian cents on Tuesday.
From Radio NZ:
Business NZ says there's no doubt manufacturers are struggling and the bank should follow the lead of the Reserve Bank of Australia, which lowered its rate on Tuesday to 3.25%.
Business NZ chief executive Phil O'Reilly says it's not necessarily about trying to take pressure off the dollar, but the Reserve Bank does have to take into account that the economy is slowing.
However, he does not believe the bank should try to manipulate the dollar.
Weaker second-half growth
The call from Business NZ comes as economists and Treasury pick weaker economic growth in the second half of the year than in a surprisingly strong first half, which was put down largely to good growing conditions for the agriculture sector and construction activity.
In its latest Monthly Economic Indicators released on Monday, Treasury said that despite a softer outlook for the rest of calendar 2012, a combination of factors should continue to support growth in the near term.
"The Canterbury rebuild is gathering pace, prices for our commodity exports appear to have reached a floor, and increased housing market activity should support consumer spending on big-ticket items too," Treasury said.
"However, the outlook is not without its headwinds and risks, with parts of the economy looking to have lost some momentum over recent months, the risks for agricultural production mainly on the downside, and ongoing concerns over the international economy," it said.
"All told, the risks to our Budget forecast of 0.6% quarterly GDP growth in the September quarter lie on the downside."
Looking patchy
Westpac economists said on Monday that September finished with another round of patchy indicators for the New Zealand economy, extending the evidence of a softer performance over July and August.
"That said, we wouldn’t want to overstate this trend. The weight of evidence still points to positive growth, although the surprisingly strong 1.6% GDP growth in the first half of this year will be difficult to replicate in the second half. And the data is telling us at least as much about the two-speed nature of the economy," Westpac economists said.
Exports are clearly at the tougher end of the spectrum at the moment. The August merchandise trade balance showed the legacy of weaker export prices over the last year, with the New Zealand dollar failing to provide a buffer. The monthly trade deficit of $789m (not seasonally adjusted) saw the annual deficit widen to $866m, the worst since late 2009.
While the widening deficit is unwelcome, we’d be careful of reading too much into it about the state of global demand, particularly for our two largest trading partners Australia and China. Exports to Australia are down compared to last year, but much of the drop can be traced to the extractive industries – oil and gold – which ship to Australia for refining, not because that’s where the demand is. Outside of these groups, the trend for exports is broadly flat rather than falling.
As for China, there has been a notable pickup in exports in the last few months. Part of this reflects a sell-down of dairy products that were stockpiled as a result of last season’s excellent growing conditions (production was up 11% on the previous season). But non-dairy exports (mostly primary products, such as wood), which make up about two-thirds of our exports to China, have also shown some recent improvement. We emphasise that China’s slowdown – and the recent stimulus measures to combat it – have both been highly selective, affecting New Zealand’s ‘soft’ commodity exports in a different way to Australia’s ‘hard’ commodities.
In contrast to exporters, the construction sector is clearly poised to outperform as the post-quake recovery in Canterbury gathers momentum. Residential building consents rose 1.9% in August, and were up 4.3% excluding the lumpy apartments component. Notably, the strongest growth for the month – and indeed over the last year – was not in Christchurch City but in the Waimakariri district, which was hit hard by the September 2010 earthquake but less so in February 2011. This is testament to the drawn-out nature of the rebuilding process; the vast majority of the work in Christchurch still lies ahead of us.
It’s also notable that consents in the Auckland region have been weaker over the last three months, despite the clear evidence that a lack of new supply, combined with rising incomes and population growth, is squeezing house prices higher (the REINZ’s stratified price index for August was up 11.5% on a year ago). We’re on alert for signs that the Canterbury rebuild might be draining resources from other regions, which could re-stoke inflation pressures.
50 Comments
Yes seems very odd Gummy. I wonder why that is?
What was that at the back, oh really, we tax savings, but not property investment, hmm, fair enough. Oh, and we have a risk weighting system that is loaded toward asset based lending, hmm, fair enough. Oh, and if we are to start a business with intent of any scale at all we should consider exporting while in early stage development, but you say the exchage does what, really, wow, hmm, fair enough.
A pip or two for your thoughts about how to solve these little problems?
Quite right JimboJ and some of my risk investments involve just such people who, lacking property could not get reasonable loans from Banks...and were at the mercy of Finance Companies at considerable expense.
They are doing well, given the climate and I have had no problems in terms of payments or the like. It requires a fair ammount of due dilligence initially on my part ,as well as the risk attached, but I have no complaints at all..
It's way better to have the money working than lying around for Bankers to put to work for their interest only.
Oh BTW....a must to include an airtight contract that precludes any other borrowing, sub loans, credit extensions, first born and the like.
I would have to agree on that 100% at the moment SK and in the foreseeable future.
Over the last three to four financials my active investments , while not without attached risk have returned above 10% average, while my savings as in TD's and the like have returned squat by comparison.
This does not help however risk averse savers who are being pounded into he dirt to the point the Banks make it seem like your just lucky to have somewhere to posit it.....as they leverage it to hell enjoying the fruits of your money and offering no guarantees you'll see it again if their exposure becomes....sunburn.
It's a stupid place to be in....but the RBA and RBNZ did it to themselves with a little help from the Banking fraternity's obscession with property.......China the wonder dog......the Commodity trap....and never saw it coming...?
Don't be too quick to throw the baby out with the commodity tailings , Count .... some commodities still look OK ; the Chinese are accumulating gold at far greater quantities than even they can produce ; and with nuclear power and thermal coal being " blacked " out , other energy sources look interesting ; plus of course , grains are in short supply ( thanks to the Yanks drought and their bio-fuels programme ) .. .. ..
..... butcha hav'ta laugh , dontcha , at the Aussies ..... after 10 years of the resources boom , it's all been spent ! ....... the federal government now spends $A 350 billion per year , up from only $A 150 billion a decade ago .....
Where's next year's largesse gonna materialize from , Swannie ?
Cuts - more mortgage rates cuts coming.
Car finance at 2% in the USA.
Sub-5% fixed rates on their way in NZ.
Pity if you fixed already - now you're stuck on higher rates. Emergency measure cuts will be needed again very soon.
Otherwise the banks will be left with underwater properties as security.
An expected cry for any business to acheive and increase in NPAT - reduce one's interest liability and deliver a quick win to shareholders.
These companies need to be focussing on the longer term by increasing their EBIT margin - and this comes via a number of factors, more commonly wrapped up in the phrase 'increasing productivity'.
Increasing sales, establishing win:win arrangement with suppliers, using technology to give your business that competitive advantage against one's competitors etc etc.
Business had it's win on interest rates when they essentially fell by around 5% in 2008/9.
To quote a friend of mine 'Think harder Homer...'
Interest rates need to go lower so that boring savers, rather than hoarding money, actually do something productive with it.
On the other side sub 4% mortgages, which we should see within 6 months, will prompt building activity which in turn flows right through with a positive impact on the economy.
Buying existing real estate is not a producitive activity, nothing has been created. Low interest rates have not resulted in increased building activity thus far. Increasing the current account deficit by taking out a loan is not constructive either. Maybe there needs to be a levy on borrowers :-)
Most of the domestic economy revolves around people living in houses & buying stuff to put in them, getting tradies to work on them, roads/transport to build for them to go to work, etc etc. All economic production revolves around providing goods & services for humans - guess where people live? In houses.
SimonP - many thanks for that link - I had missed that important conversation.
A levy (tax) on debt. Paying one's share of the economic risk they have placed on the economy.........bet that put a twinkle in a few people's eyes when they realised how much they could make out of it. It will be interesting to see if there is any further discussion.
Well as a depositor / saver I pay 30% on the interest and if on the other I borrow and buy something I pay GST...so its taxed twice so far.....
The thing is there is no encouragement to get out of debt if that debt interest is reducing your tax bill.....hence a CGT is of use.
regards
won't do banks and government and PI's any harm either. after all, if we pump more credit created on a money tree (bank) to solve the problems created by too much money and irresponsible lending, and interest-only mortgage payments based on "productive" speculation, surely this time it will fix it rather than make it worse?
To misquote Einstein, doing the same thing and expecting different results is the definition of..... common sense?
The argument from O reilly, a u turn is problematic.The cut will only be effective if paired with a fiscal policy initiative,as some form of CGT on investment property,or removal of interest deductions on property revaluations etc.
The price gouging from Oligarch industries due to asset revaluations such as airports,energy distribution, energy production etc .
A minor rate cut won't be enough, especially when competing with countries already at 0%. What do you think that does to NZD? It goes up, killing exports. That kills jobs. Dairy- down, tourism- down "New Zealand is too expensive." There's #1 and #2 sources of income for NZ.
If you want massive deflation in NZ, just keep interest rates high(er). Then watch your tenants having trouble paying their rent .
There is no choice but to cut interest rates hard. Like 75 basis points, for starters. Otherwise, say goodbye to your property capital gains, as deflation rears its ugly head.
Has anyone here read the securities law? Its al minefield. Too costly. Too risky now to be a director. Everyones being thrown in the clink for failings made a decade ago. Jesus we have just been through the worst economic collapse since the 1930s!
No one is going to start up a business of any size whilst this hangs over their heads, and they certainly won't be taking public money along for the ride with trigger happy regulators.
. So hey those wealthy enough to borrow privately will make above average vreturns. Those that can't will go backwards earning a miserly return from KS and bank TDs. This is the new world we live in.
The Q is why cant NZers do the same thing? If it makes economic sense for someone abroad to borrow heavily, buy cheap and asset strip, why cant NZers do the same? bad in terms of real business, sure...still Romney hasnt blinked in doing it.
"pennies in the pound" If you look at the 1930s those that had cash still could buy distressed companies at fire sale prices....and make a profit.
I expect that we will see the same again....so personally I think foreigners buying for too much $ will be to our advantage, let them takes the huge losses I expect rather than NZers. NZers can then walk in and pay a fair price....
regards
but what income? We would be borrowing for a quick killing and not as a going concern.
I think they will be pressurised by market forces, like Ive said before paying 20million for a farm whos return drops from 5% to <1% means the farm is worth 2million.....bye bye investor, hello kiwi buying at 2million (or less).
NB many foreign students come here so our degrees have a cost effective ratio. Try doing the same thing in the USA....
regards
SK - (my apologies to others who've heard it before)
Those mortgages (and those incomes of those electricians, plumbers etc, who probably service mortgages of their own) are totally dependent on future incomes.
Those incomes require the resources - and the energy to process them - to be available, to produce the goods/services.
We had a temporary disconnect, where the having of money (even in the form of debt) meant to most first-world folk, that they could 'buy' stuff. Many piggy-backed on real activity (all paper-shufflers are in that category). For a while, and for perhaps 2 billion folk, that worked. The planet (and no resource comes from anywhere else) is at the limit of being able to supply now, but those one-stage-removed paper-shufflers still expect to charge for the shuffling, and buy a Beamer from their 'earnings'.
So we can confidently predict that the majority of mortgages currently held, won't get paid back at the current understanding of 'value'. The numbers will have to be inflated or QE'd away, if the numerical system is to be continued.
Clearly, real incomes must fall vs material available (you can't ramp from 1 billion to 7 billion in less than 200 years, expect an exponential per-capita consumption increase, and expect otherwise). A global doubling is out of the question, so pick your pa%, and know the end-time. (3% growth doubles 24 years, 10% in 7 years, etc).
One of the clues, might be to look at the dwelling area per-head say 50 years ago, and anticipate there being more folk in the existing structures. I see a pressure coming for inter-generation use the of 3-bathroom nonsenses, as housing 2-3 nuclear (0-2 kid) families).
I agree with that PDK. If the goodies can't be, or arn't being, produced. They can't be consumed. No amount of 'language' such as QE etc will change that.
It seems we have a bunch of 'americanisms' - words designed in the financial services systems to conceal a harsh realtiy.
While I share your view on limits to population thats not my point here. I see at a more micro level that terms such as 'bailout' in relation to Greece just conceal what that actually is. Lending to people who are insolvent, just conceals that they have consumed more than they should. It needs to change. And enabling more of the previous behaviours just repeats the previous mistakes.
"The planet (and no resource comes from anywhere else) is at the limit of being able to supply now"
Actually for an average of 12 hours a day, 365 days a year the earth receives an abundance of free resource from the sun. Follow through the principle that no energy is ever lost it only changes form and realise that the potential is huge for future supply.
http://www.amazon.com/Green-Hell-Environmentalists-Plan-Control/dp/B005…
This book tells how the government and environmental elites will soon have you under their Green thumb - and what you can do to stop them. It seems everywhere you look, all you see is green. People are 'living Green', businesses are 'going Green', and consumers are 'buying Green'. But pretty soon this trendy 'Green' lifestyle won't be voluntary, it will be mandatory. Steven Milloy, founder of JunkScience.com, shows how the government and environmental elites will soon have you under their Green thumb, controlling the speed you drive, the temperature of your home, even when you can retire...and that's just the tip of their melting iceberg.In this shocking new book, Milloy reveals: how the government may soon control your energy use and the temperature of your shower; why drive-thru restaurants and bottled water may be banned; why today's high food and gas prices will soon seem cheap; and, how an all-Green society will cut into your travel plans, retirement fund, dictate the size of your house, and more. Unbelievable but true, Milloy argues that in our haste to save the planet, we're dismantling the progressive society we live in for the sake of Green controls that aren't actually helping the environment.
Dazz - solar energy is indeed the way to go. I used to Co-Chair Solar Action, and ran our house off a single 50-Watt PV panel for some years (now run a micro-hydro and the panel is backup). But - solar PV is only 15% efficient, and the technology has to be made using existing energy sources, and finite/contested resources/materials.
Mortgage-Belt. That's spin and lies. If you believe it, you're lying to yourself. Blame-shifting something I (and folk like me) have been warning of for 40 years, doesn't change reality. It's not 'greenies' who are responsible for depletion of finite resources, and all your stuff that seems 'cheap', is/was made from the oil we have chewed-up about half of. The best half first, of course.
All the instances you point out above, are actually a result of a species in overshoot, running into the limits to growth. No exponential extraction on a finite planet could end anywhere else.
To blame others at this juncture, with so much evident, is to lie. Contemplate that though over the weekend, perhaps. One presumes your continued employment/income/repayments/lifestyle require the above not to be so? Seems to me a few on the Titanic started from the same false premise.
Of course, maybe you know that there isn't/can't be enough to go around, but want to be an elite who get what they want at the expense of others? That's a valid Darwinian approach, but being honest about it would indicate some fortitude.......
Thanks but I'm not just thinking of solar energy it its immediatley harvestable form. The point I'm trying to make is that many forms of energy can be traced back to the sun as it source and therefore a supply outside the planet.
Photosynthesis is not often talked about on this site for instance. But it is the means whereby the suns energy is turned into firstly carbohydrates, then protein,fossil fuels, etc etc. That effect is not stopping anytime soon.
The energy from the sun also drives the weather patterns which give us energy from wind and hydro.
"The energy from the sun also drives the weather patterns which give us energy from wind and hydro. "
In fact the entire CLIMATE is 100% driven by the Sun........................but try telling Nick Smith and other ICCP plonkers that? Apparently our minut human amount of CO2 (.01 of 0.1 %) emissions even surpasses the Earths Water Vapor effects!
Go figure.
Dazz - no, but all photosynthesis is currently spoken for. To use some of it, you'd have to triage. I recently went to a fascinating lecture by one of a team who are taking a bit of DNA each from some plant (selected for ease of working-on) and re-assembling it in energy-gain-but-nothing-else form.
The lead-times, though, and the scale-up, don't make it. It's an academic exercise, too little, too late. The problem is that fossil fuels also supply tangibles like bitumen, plastics, fertiliser.... I don't think casein scales up to 100mm pipe....
Try maths, specifically the expotential function and ratios or EROEI
expotential, pick a % growth, say 5% per annum....70/5 means teh energy wanted doubles every 14 years....
I forget the actual years but that doubling time results in us using all the Sun's energy inside something like 450 years and 2500 years the Milky way.....
Clearly that cannot continue for ever........
EROEI, this is energy return on energy invested....for our economy it has to be 10 to 1. So for every 1kw I put in I have to get 10kw back....PV panels are not likely to cross that threshold ie they cost more to make than they give back as a ratio greater tahn 10 to 1.
Then economics, our entire system only works on the oil equivalent of $50USD a barrel, at most $80USD.
Try physics
You quote energy yet its pretty clear you dont undertstand what you quote....Energy changes form to a lesser state....entropy....you lose at every conversion....
regards
Well lets examine his logic.
Why would they turn positive? To start with its a "IF" not a when, at least in terms of significant flows for protracted periods. When did that last happen? if it did what was the impact at that time?
Lets say the flow does turn positive. The answer would be the ppl who went abroad to work in say the mines come back because the work dried up....and they wouldnt by and large be walking into work here.
1) They probably wouldnt have money to buy and maybe rent.
2) They probably would be going to existing homes dispersed around NZ.
Also how many homes are foreigners like the Chinese hiding wealth offshore? If the above happened maybe there would actually be a net outflow of $s as they repatriate their $s, or moved it elsewhere...
So there are so many variables that to conclude prices will go higher based on net + inflows seems dodgy...IMHO.
Lets face it good old TonyA has been pretty much wrong for 4 years, his track record isnt the best...
regards
Yes it would hurt and tremendiously.
Low rates - they are not so much recover as not death dive into a Depression. "Still nothing" is correct, energy is now expensive so smothering expansion, debt is crippling us....
1987 to 2007, well go look at the oil price then and now. Look at debt then and now. Look at financial ponzi then and now.
Investing has risk....you are right IMHO, if the returns are low the risk hasnt dropped, in fact the risk is probably higher....hence its probably not worth investing, Im not.
Lows are not working, well its classic keynesian economics, actually they are, its helping to stop a depression. Go high and lots of mortgagees default, business default as their overdrafts now shoot up in costs....ditto farms and others just barely getting by because low business lending rates help them.
Sure go high, but you might as well flush your investments down the toilet as we go into a Greater Depression.
regards
Thats correct IMHO. We have taken from the natural resources of the planet without accounting for that cost / damage in our profit margin. Moving forward because there isnt the resources for the taking we will have to pay to grow it....we will be forced to account...
For instance instead of fishing for wild fish, consider the cost of having to grow them first.
Hence profits are going to be a lot smaller and in turn interest rates / dividends a lot smaller.
regards
...... I have , at some length , exhorted Bernard to jazz it up a little ..... the constant refrain of doom , gloom & despair has worn thin ; we're de-sensitized to his incessant barrage upon our fear factor amygdala ......
Pizzazz , Bernard ..... inject lashings of pizzazz , or you'll lose them .... take lessons from Champagne Charlie , dear boy , there's a chap with oodles of zip , zing and blammo !
I don't know GBH. interest.co.nz welcomes guest columnists. You could do a weekly Good Times column and submit it to Chaston. You need to publish under your own name or a pen-name, or you could call yourself Gloom Busters Heironymus (GBH) with apologies to Hieronymus Bosch, (c. 1450 - August 9, 1516) an early painter of the fifteenth and sixteenth centuries. Many of his works depict sin and human moral failings.
..... sin and human moral failings ...... yeah , I could do that ....... seems a freakin' sight more fun than being locked up with Big Alan Bollocks during his monthly OCR ramblings .......
" Sin & the Human Failings ! " ...... this'll be bigger than CLEO or NEW IDEA .......... I'd better dive into some in depth research ASAP .....Nana Plaza in Sukhumwit Road would be a brilliant place to start on Gummie's new project ....... this may take some time , keep Bernard riled up whilst I'm gone .... .. I can't wait ! ........ yipppppppppppppeeeeeeeeeeeee ..
Cheers , Mr iconoclast ...... owe you one , buddy !
Ivan has unwittingly - :) - stumbled on a truth.
If we have peaked energy, we have peaked interest-underwrite. Has to trend to zero, then below, if it the system is to be continued.
One suspects that the interest-chargers will carry on extracting their pounds of flesh, though. Which means others must carry the increasing deficit.
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