The Dominion post had a good set of articles on Thursday illustrating that there are winners and losers from interest rate cuts.
I’m not sure how happy I would be able having a picture of myself in the paper with the title LOSER on top of it – but haven’t got all that much in savings so I might be safe 😛
Colin Espiner is back from his Christmas break and he is surprised to see how panic stricken New Zealander’s are. It was the same for me when I came back from the US in mid-November – sheer panic had seemingly overtaken people view of what a recession was.
Lets keep in mind that people currently expect unemployment to peak at just over 7% in 2010, following a 2% decline in activity in 2009 (or about 3% per person). Scary numbers aren’t they – well no.
See, most people won’t notice the recession apart from a little bit of nervousness and cheaper prices (has anyone seen the deals on appliances!). For a massive majority of people there is no need to worry about a recession.
However, the impact of the recession is not the same across people – incomes don’t fall by 3% for everyone, some people lose their jobs and truly struggle. Even so, we have a tax and welfare system that redistributes from those who are working to those that have lost their jobs – the pain of being unemployed will not be as severe as it has been in the past. Furthermore, education and training are available all over the show nowadays – giving people the opportunity to take advantage of changes in the labour market.
Colin is right – if this is the end of the world then it is a bit of a let down 😉
Links agreeing with Colin in some way: Homepaddock, Kiwiblog, Rates Blog, The Reserve Bank.
Update: I wonder if Colin convinced Blanchard to come out with this (it is part of a roundtable discussion by economists, ht Economist’s View). Either Colin is inspirational – or his comment was impeccably well timed 🙂
Yes we have borrowed a lot to buy houses – but if people in New Zealand have been borrowing to buy houses off each other, why does that increase our net international debt position? Someone must have been paid a good sum for their properties – what has happened to them?
This fact makes me nervous about claims that our current account deficit stems from “borrowing to buy houses off each other”. I have heard this claim a lot – and I don’t think it makes much sense.
In the US they borrowed to build “too many” houses – but we didn’t even do that here in New Zealand. So what have we done with our borrowing:
Ok, we can have opinions about those things and whether we believe they are good (I do, outside of the possibility that households mistook recent house price gains for wealth – which was unfortunate but impossible to prevent in an appropriate way). And the housing bubble could have contributed to higher consumption imports by making home owners feel wealthier, sure. But I don’t see how borrowing to pay other New Zealander’s for their existing houses increases our national debt level …
Big cut – bigger than the market expected, bigger than I expected. The deteriorating outlook for world economic activity appears to have been the primary factor driving this reduction in the official cash rate.
Now lets keep an eye on the dollar and on mortgage rates …
There is a complete consensus that the Reserve Bank will cut the official cash rate. However, the size of the cut is still uncertain.
Mearly a fortnight ago, safe money was on a 50bp cut with a large number of commentators suggesting 75bp. To be honest, after coming out of December MPS it felt like another 75 in January was pretty likely. Of course, since then world economic growth forecasts have collapsed, and domestic economic indicators have deteriorated – leading analysts to push for a 100+bp cut.
It is a tough call in such a fluid environment, but I’d be of the view that the Bank won’t go past 100. Why? Well commodity prices have steadied since December, credit markets have started to thaw, and a bunch of essential data points still haven’t been released – namely the December quarter employment figures. If those figures are bad they can just cut 100 again in March – and they have a set of forecasts (from the MPS) to justify what they are doing.
Still – I have been consistently surprised by how much the Bank has been willing to cut the OCR 🙂 . We will see tomorrow.
Homepaddock reports that Fonterra has cut its forecast payout for the coming season to $5.10 – well down on the $7.90 paid last season.
This is a significant decline in returns, however even though prices could go lower it is unlikely they will this season. As a result this leaves us two other factors to look at when figuring out what will happen to disposable incomes among diary farmers: quantity and costs.
As we are coming out of drought, quantity will have moved back towards “normality” (for an individual farmer) – this should help to improve returns relative to last year – however, farmers would have already accounted for that when making decisions.
The more important factor for me is costs. Have fertiliser prices begun to tail off? Will the sharp pull back in fuel prices help out? These sorts of questions will be key for figuring out how heavily dairy farmers disposable income will suffer during this lull in dairy prices.