Matt Nolan

What is the exchange rate telling us

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There is an interesting article on the Rates Blog that I have been meaning to mention by Rodney Dickens.

Although I don’t agree with him that the RBNZ is being silly – I do think he makes a good point when looking at the exchange rate.

the forex market [may have] pushed the exchange rate up because it has correctly assessed that NZ growth prospects have improved

When I read this on the 5th I agreed with it – and if anything this point of view is becoming more obviously right as a bunch of good data has come out.

However, I would take a step back and try to understand what is going on here. I don’t think that the growth outlook is the sole factor – we also have “risk taking behaviour” (as our currency is a form of investment) and commodity prices (as our currency helps to share any gains from a terms of trade lift.

Now ANZ reports that commodity prices rose in both March and April – so this is some of the reason. However, in $NZ terms they fell – implying to me that there has been more to it. With the DOW rising from 6,500 to 8,500 (among other indicators) we can tell that there is some risk loving behaviour coming back – making a high yielding currency like the $NZ attractive. If we strip these out we might find that the market expects marginally higher growth – but I’m not convinced that this view is particularly different to the RBNZ’s March forecasts 😉

Matt Nolan

Australian unemployment also surprises …

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So unemployment in Australia fell from 5.7% in March to 5.4% in April.  Following our better than expected March quarter this is all very interesting.

Very interesting …

Matt Nolan

Mar 09 Unemployment: 5%

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This figure is far stronger than the market expected (5.3%) – and well stronger than I was thinking (I was personally seeing scope for 5.5% given how quickly the UR rose in 1990/91).

I know unemployment is a lagging variable – but just reaching the “neutral rate” after 15 months of recession is a strong sign for the NZ economy. I don’t know how we can even get to 7% unemployment in a situation like this (unless the recession is still going strong in 2011 😉 )

This is a very strong result – make no mistake.

Also careful trying to say that employment or the participation rate were rubbish – they are still both up on a year ago 😉

Matt Nolan

How dare they compete!

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Another article on alcohol retailing provides this “beautiful” quote (FYI this follows on from a previous post):

The end of loss-leading was welcomed by Glengarry product manager Liz Wheaden, who said the practice had the potential to lower customer expectations at the same time as it “destroys” brands.

Loss-leading made customers come to expect to be able to buy a product cheap, Ms Wheaden said.

While her company had never used loss-leading, the practice had forced Glengarry to offer more variety and improved customer service to compete.

How dare supermarkets push other retailers to cut prices, increase choice, and improve service. Have they no shame!!

Matt Nolan

Is NZ fiscal stimulus lower than the rest of the world?

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There have been accusations from some blogs that the NZ fiscal stimulus is too small relative to the rest of the world (No right turn, the Standard). However, I didn’t think this was right.

Now the OECD has shown that this isn’t right:

fiscal-impulse

Now this isn’t to say that the fiscal response is right – it may be too small or too big. But it is to say that we aren’t pumping in a small response relative to the rest of the world. In GDP terms we are sixth – just behind Aussie.

Update: Link to OECD report (ht Keith Ng)

Update 2: Appears that some countries were undermeasured by the report (ht Gareth):

As an illustration, tax cuts decided in 2006 or 2007 but implemented over the period 2008-2010 in Denmark, France, Poland and Spain are not included, although they may have contributed to cushion the economic downturn

This explains why the stimulus in these countries (excl Spain) was so low.  And I can understand why Spain would need a larger stimulus with their high unemployment rate (* note I suspect that the 17.4% figure is an exaggeration – as I think they include more potential types of unemployment than we do)

Matt Nolan

Why are they making my beer more expensive?

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Pressure from parliament has led to supermarkets finding a way to collude and increase prices for alcohol sales. That is what I read from this article in the Herald.

Of course it is being framed this way so that it sounds like a winner:

The two big supermarket chains say they have stopped selling alcohol below cost as a “loss leader”, after claims the cheap deals lead to alcohol abuse

What a load of rubbish.

As long as the tax associated with alcohol consumption represents the costs and benefits (a hard issue as has been discussed in many places) then we don’t need to fluff around with this type of rubbish – as the price would represent market competition AND the social cost, thereby implying that the choices being made are in the social interest. But instead, in order to seem hard on something people view as a vice supermarkets have been pushed into a situation where they can collude in order to increase profits.

How? Well, it is true that alcohol is being treated as a loss leader. But its effectiveness as a loss leader depends on the price charged by the other firm. Under the guise of “the social good” the supermarkets have been able to agree to both increase prices slightly – keeping the relative “loss leader” advantage while making more money off alcohol sales.

It just goes to show – when people start getting the government to pressure firms based on the arbitrary morals they want to force on society, we will end up being taken advantage of by someone. I want my cheap beer back …

Update:  Paul Walker and Brad Taylor both have good posts on the issue.  Starting from this comment Agnitio brings up interesting points regarding how to view the socially optimal price in this setting – his criticism of my view is very good, even if I don’t agree with it yet (you can tell it is a good criticism because my defence isn’t very clear – the best I can do is say that it is a transfer from producers to beer consumers, but the GE impact is foggy).