The rampant Kiwi dollar is likely to encourage more manufacturers to relocate production to low cost Asian countries. In fact, several manufacturers had already announced plans to move production before the latest Kiwi dollar rally. This will mean more job losses in an industry that has been shedding jobs over the past few years. In April our iconic whiteware producer Fisher and Paykel signalled their intention to relocate 350 jobs to Thailand. Next was Sleepyhead with a possible 250 jobs, followed by Dynamic Controls with another 200 jobs, both to China.
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With the New Zealand dollar surging tonew post-float highs on a regular basis, the viability of exporting is underthreat for those outside the dairy sector. The pressure on exporters has seen US professor Steve Hanke recently assert that our economy is in a "death spiral". Hestated that "you get a flood of capital coming in chasing the high interestrates, and the flood of capital, of course, aggravates the inflation problem"leading to even higher interest rates.
The Reserve Bank’s recent intervention inthe currency clearly signals their belief that the current New Zealand dollar exchange rate is unjustified by economic fundamentals. But how much confidence can we store in the statement that the kiwi is "overvalued"?
Alan Bollard’s recent reappointment asgovernor of the Reserve Bank for another five years saw Michael Cullen lauding"his integrity and outstanding general management skills". Those qualities maynot be in question, but in terms of actually doing his job and keeping acredible rein on inflation, Dr Bollard’s results have been unimpressive. Nevertheless, this year’s interest rate rises have shown a steelier side to theReserve Bank governor, and imply little hope of relief for mortgage holders inthe foreseeable future.
Michael Cullen has delivered his eighthout of a likely nine budgets. Although we expect to only have to endure onemore, we are likely to face the consequences of his complex and prescriptiveinterference in the economy for many years to come.
New Zealand doesnot have a long term saving problem. With open capital markets, the decisionto save or borrow is purely a financing decision, and one that is driven by theprice of credit. The international price of credit is very low at present. Taking advantage of these low prices is a rational response by New Zealanders.
Annual average GDP growth is at a seven-yearlow, but economic forecasters appear to have broadly accepted the ReserveBank’s commitment to raising interest rates higher. This combination suggeststo us that the Reserve Bank has explicitly grown less accepting of medium-terminflation pressure, and that it has largely convinced the market that anaggressive stance is necessary.
The popularity of property investment thisdecade has led to declining yields across the board, with rising prices hittingthe returns available from residential, commercial, industrial, and evenaccommodation buildings. With lease agreements coming up for their 2-3 yearrenewal, the property sector is now in the midst of a period where landlordsare looking to recover some of the ground lost during the price boom of thelast few years. Building owners almost always hold the upper hand in thesenegotiations, but current economic conditions suggest they may not have it alltheir own way this time around.
The affordability of housing is currently ahot topic. But even with house prices so high, over 102,000 properties changedhands last year – implying that housing is still affordable for some. Simpleeconomics tells us that prices would not keep rising if they weren’t beingdriven by demand.
The government is set to introduce amandatory sales target for bio-fuels with the goal of improving the security ofNew Zealand’s fuel supply. However, the economic benefits from this policy could be outweighed by the additionalcosts imposed upon firms and consumers, as well as stifling longer-term effortsto produce efficient bio-fuel domestically.