Matt Nolan

Government stimulus: Will Cullen be able to save the day?

/3 Comments/in /by

There has been a lot of discussion around the internet about whether and what type of fiscal stimulus is appropriate in the US. That is not the issue I am going to discuss here. This is a New Zealand blog, and as a result, I’m more interested in the claim that Michael Cullen will be able to intervene in the economy to save us from any impending doom.

I’m not entirely convinced that Dr Cullen will be able to save us in the case of an imminent economic collapse, and here is why:

Read more

Matt Nolan

Ten things people will say economists said

/4 Comments/in , , /by

Over at the Big Picture they are discussing how silly the decoupling thesis is (the idea that that world economic growth now functions separately from US economic growth). Near the end they mention ten things that seemingly intelligent people have said, that have turned out to be complete rubbish, namely:

  1. The Yield Curve no longer matters
  2. Earnings at an unusually high % of GDP are sustainable
  3. The Business Cycle has been defeated
  4. Ignore sentiment readings, the population is just upset about Iraq
  5. Real Income gains are irrelevant
  6. Mean reversion no longer applies
  7. Supply side tax cuts pay for themselves
  8. Dow Theory is a quaint antiquity
  9. The (so-called) Fed Model “proves” equities are significantly undervalued
  10. Despite commodity prices, there is no Inflation.

Read more

Matt Nolan

OCR review preview: a surprise cash rate cut in the US

/1 Comment/in /by

Tomorrow will see the Reserve Bank decide whether to lift the official cash rate.  Pushing them towards lifting rates will be a high CPI reading (although non-tradables was weaker than expected), the strong inflationary pressures illustrated in NZIERs quarterly survey of business opinion, and the fact that inflation expectations are threatening to become entrenched at high levels.  Possibly preventing them from hiking will be a weakening housing market, the potential for slowing world economic growth, and today’s shock inter-meeting cut by the Fed.

Today’s cut by the Fed is especially important, as it will help put upward pressure on the New Zealand dollar, at a time when it looked like it was easing.  This will, at least in the short term, give the Bank some room to breath in terms of tradable inflation.

Overall, the Reserve Bank seem unlikely to lift rates tomorrow.  However, the market still expects a hawkish tone from the Bank, if they don’t get this expect some renewed downward pressure on the dollar.

Will Taylor

Housing Affordability: A Vicious Cycle

/5 Comments/in /by

The Herald has reported on the results of a recent survey which show that New Zealand is now the least affordable place to buy a house in the world. The study reaches this conclusion by examining average wages and house prices.

Given the well documented gap between wages in New Zealand and overseas, the housing bubble and some of the worlds highest interest rates it isn’t really surprising that we have the least affordable houses in the world. The problem is of course exacerbated by the the fact that our Reserve Bank is mandated to control inflation and thus the increase in house prices has caused interest rates to rise: It sucks to buy a house right now!

So we know why houses aren’t affordable, but should we really be the least affordable place in the world to buy a house? It’s not like we are struggling for land to build houses on: We have the population of Sydney spread over roughly 20 times as much land. This is why the authors of the study suggest that freeing up more land on city limits could help solve the problem, something that Don Brash has apparently suggested previously. This seams like a logical solution for a country like New Zealand.

One can only wonder where the government got it’s advice for the Housing Affordability Bill. The Property Council and Master Builders Federation point out that requiring developers to include low cost houses in any new development will just force the developers to subsidize this by increasing the price for the other houses in the development. The best this policy can achieve is a zero sum.

Matt Nolan

New Zealand articles

/1 Comment/in /by

If you are desparately in need of some New Zealand focused economics over January, take a look at the archive of Infometrics articles for the Dominion Post.

The next Dom Post article will appear on January 26th, hopefully the team hear will be back to writing by then.  If you would like more information on any of the articles just leave a comment and I’ll work with the author of the article to make a blog post on it.

Matt Nolan

September quarter current account – GDP primer

/5 Comments/in /by

Today’s Balance of Payments release put the current account deficit at 8.3% of GDP.  This was right on the button of market expectations, however some interesting issues cropped up which will be important for tomorrows GDP release.

The actual current account deficit was a touch worse than market expecations, enough to make the deficit as a proportion of GDP 8.4% if market expectations for tomorrows GDP result held.  By itself this would indicate that either:

  1. GDP growth was above market expectations for the quarter (0.3%), or
  2. The GDP deflator is higher than we anticipated

Both of these results would cause a headache for the Reserve Bank.  However, the story becomes a little more complicated.

Read more