Reserve Bank Forecasts
I’ve been going through the data on which the Reserve Bank based their announcement today that they intend to lower the OCR later this year. It is not pretty:
- Inflation projected to hit 4.7% by September 2008 – this will be the highest inflation has been since December 1990.
- Economic Growth to slow to under 1% in 2009
- The lowest level of house sales in 18 years
- A drop in the TWI from over 70 to around 60
- A rise in unemployment from 3.6% to 6%
- A drop in house prices of 13%
I almost pity Bill English who is likely to inherit this. Not as bad as 1990 but nothing like the booming economy Dr Cullen inherited in 1999.
The summary is NZers will have almost big price rises, low economic growth, around $70,000 knocked off the value of their family home, and around 50,000 more unemployed
The MPS noted:
Faced with lower nominal income growth and higher consumer prices, households must decide whether to take on extra debt or lower their standard of living.
What a lovely choice. However the Reserve Bank hints at an answer:
Many households will need to devote a high proportion of their income to debt servicing costs, limiting their discretionary spending. High global food and energy prices will have a large impact on the spending power of households. The domestic prices of these goods will be pushed up further by a weaker New Zealand dollar. The tax cuts and increased transfers announced in Budget 2008 will provide some offset to these rising costs over late 2008 and early 2009.
So further tax cuts would provide further assistance to households facing a choice between extra debt or lower living standards. Labour is crying that further tax cuts will mean cutting of public expenditure. So they seem to be saying that households should cut their standard of living, rather than have the Government cut its expenditure!
June 6th, 2008 at 9:58 am
is it a bad thing that i’m looking forward to a substantial decrease in house prices?
sure it will wipe value off what i already have, but i don’t intend selling and they will bounce back…
it will however allow me to buy more investment properties
imho buying a rental has been uneconomic for about 3 years now.. so its time for Dime to sit back, bank some money and wait 
also – will make it easier for first home buyers and may stop any government giving them a hand out!
June 6th, 2008 at 10:03 am
is it a bad thing that i’m looking forward to a substantial decrease in house prices?
I couldnt believe looking at the Property Press, houses in the area we want to live that we could afford!!!!
Typical that we have already decided to migrate though…..
June 6th, 2008 at 10:19 am
Correct me if I’m wrong here, but the policy targets agreement commits the RBNZ to maintaining inflation in the 1-3% band on average over the medium term, and that it should pursue that goal while putting some weight on not inducing excessive fluctuations in other economic indicators.
If we define the medium term as being the number of quarters over which we must average in order for average inflation to be less than 3%, the medium term is about 9 years. 35 quarters. Most macroeconomists would define the medium term as being maybe up to 3 years; if we want to define it instead as the period over which we’re likely to expect reserve bank policy to affect real variables, say maybe a year. Two, maybe. 9 is right out though.
How is it that the RBNZ current policy is consistent with the signed policy targets agreement? If they want to be honest about it, they either should fire Bollard or tear up the policy targets agreement. RBNZ is ruining the credibility it built up under Brash.
We can’t use the “avoiding excessive fluctuations” as wiggle room here because timidity on interest rates now, given inflation rates, just means that the correction has to be a lot larger and a lot more painful later.
June 6th, 2008 at 10:29 am
Good on ya Dime. Me too.
June 6th, 2008 at 10:55 am
As I blogged over at No Minister this morning, while Bollard gave the gloom and even TV1 joined in , where was Dear Leader? What was her priority yesterday?
When the country might have sought comfort from it’s Prime Minister about their jobs, homes, living standards; she was playing to the UN gallery and talking about sustainability. She must be desperate for that UN job now she’ certain she’ll lose her’s.
World Evironment Day meant more than our own Economic D-Day.
Adolf is calling on Liarbour to have a plan to get us out of this economic mess, even though Liarbour is largely responsible for us getting here.
But with the emissions trading, on top of the budget, Liarbour does have a plan.
But rather than make things better, it will only make things worse, with the EMS set to raise food and fuel prices further and cost thousands of jobs.
But what about sustaibility of the economy Dear Leader?
Your government might say we have prospered over the last 9 years, but we’re going backwards now!
http://www.nominister.blogspot.com has more
June 6th, 2008 at 10:55 am
Crampton: “the policy target shall be to keep future CPI inflation outcomes ” http://www.rbnz.govt.nz/monpol/pta/3027051.html
My understanding is that this change of RBNZ focus to projected CPI inflation occurred when Bollard replaced Brash under Cullen.
June 6th, 2008 at 11:24 am
When Bollard retires as Governor, it will be very interesting to assess what the average inflation rate was during his tenure, and how often it was above 3%.
June 6th, 2008 at 11:30 am
Bryan: we’re now in yesterday’s future. If we’re now having inflation outside of the band, then RBNZ failed previously; if it’s projecting another year and a half outside the band and is doing nothing, then it’s failing currently. How do we judge performance if not by realization of outcomes?
If we read “on average over the medium term” as meaning that average inflation over the period must be within the target, then the medium term is now 35 quarters – that’s the number of quarters, looking forward using RBNZ projections and back using realized outcomes, over which we must average to be within target. If we instead read it as meaning that the average quarter must have inflation within the target, the medium term is now 25 quarters. 9 years or 6 years: either one is beyond any reasonable reading of the “medium term”.
June 6th, 2008 at 11:33 am
> but nothing like the booming economy Dr Cullen inherited in 1999
Surely saying that the economy was booming in 1999 is stretching things a little? I get your point, but wasn’t unemployment around 6%, the same percentage that the Reserve Bank is predicting for 2009.
[DPF: It is all about the trend. Economic Growth was high, inflation was low, we had healthy surpluses and unemployment was dropping.
Bill English will probably inherit economic growth under 1%, inflation of 5%, surpluses which won't even be adequate to fund the Cullen Fund until 2016 and rising unemployment]
June 6th, 2008 at 11:35 am
“sure it will wipe value off what i already have, but i don’t intend selling and they will bounce back… ”
Sure, after 20+ years, if you’re lucky.
http://img.photobucket.com/albums/v207/neuralnetwriter/financial/rentalyield.gif
Look at the linked graph (found on propertytalk.com) and then imagine having bought a house in 1975, you would take 20 years to break even… And this boom was much bigger than the 1970s one…
Sell now or be locked in forever!
June 6th, 2008 at 11:44 am
Surely you dont take any RB forecasts with any credulity.
They have been WRONG every year since Adam and Eve.
The problem is that they are wrong from the pessimistic side which makes you think there is an institutional bias
June 6th, 2008 at 11:45 am
Bernard Hickey has an interesting POV on it here:
“It’s worth looking at the policy targets agreement (PTA) signed by Bollard and Finance Minister Michael Cullen in September 2002, which was referred to above by the Reserve Bank and re-signed last year without changes when Bollard was reappointed for a second 5 year term. It helps explain a few things.”
Soft on Inflation
June 6th, 2008 at 12:03 pm
David: if we start counting at the December quarter 2002 (Bollard appointed in September), and end at the current quarter, inflation has been below 3% in 65% of quarters (8/23 outside of target) for an average inflation rate of 2.7%. If we include RBNZ projected inflation through March 2011, we’re in the band in 62% of quarters with an average inflation rate of 2.9%.
During the previous bout of inflation, when we were outside the target band for 5 quarters from Dec 06 through Sept 07, Bollard raised rates from 6.8% to 8%. RBNZ seemed seriously concerned about inflation But, we’ve not had an interest rate increase since the present bout of inflation began: he raised rates to 8.3% prior to our pulling outside target in December 07 and nothing since, and he’s projecting cuts to interest rates despite projected increases in inflation.
This is all somewhat puzzling. The political business cycle story would be that Bollard doesn’t want to increase rates in the leadup to an election, but he did increase rates in 2005 in anticipation of inflation breaching the target band. You could argue that he ought to have been more aggressive in the June and September quarters in ‘05, but that’s probably just hindsight. This time round, RBNZ seems to have abandoned its commitment to the policy targets agreement.
June 6th, 2008 at 1:22 pm
Well, instead of letting Bill English inherit it, why not let Sir Roger Douglas inherit it? He has rescued the country from National before!
June 6th, 2008 at 1:37 pm
Regarding Bollard projecting cuts to interest rates despite projecting increases in inflation, Bollard obviously doesn’t want to upset his fellow wierdo Freemasonry sect buddies within Labour!
June 6th, 2008 at 2:13 pm
So property values are taking a hit are they. So following on, the GV on a property should also be taking a dive. I bet those thieving bastards in the local councils are filling their pants. Many will now be expecting a nice drop in their rates but if I lived in the city I wouldn’t be holding my breath. I know the poor bloody farmers will still enjoy been totally shafted by local government as we always have. I know rural ratepayers in this area are subisdising small rural towns by very large percentages.
June 6th, 2008 at 3:14 pm
What I love about this is *more* labour hypocrisy…
When unemployment was falling, personal wealth was climbing and the government was awash with surpluses, Cullen told us this good news was all down to his prudent fiscal management of the economy.
But now that we’re headed down at a great rate of knots, it’s all about international market forces and we have to realise that we’re just a small player in a very large global economy so we’re at the mercy of those forces.
Can’t have it both ways Mikey.
June 6th, 2008 at 4:01 pm
uk kiwi – prices would have to drop 50% for me before id start getting worried heh
that and i never intend on selling
our property market is bullshit, it needs to come back!
June 6th, 2008 at 9:10 pm
History will remember Bollard as a timid and weak Governor, one who was unable to act when necessary and who pandered to political pressure (blame Cullen for that).
His tenure at the RBNZ is forgettable, to say the least. This is an opinion shared by a number of leading economists.
June 6th, 2008 at 9:47 pm
The truth is that New Zealand is heading for a recession.
Compared with Australia’s continued resource boom the lookout going forward doesn’t look good for New Zealand. There will be plenty of pain ahead. If only there was someone ideally suited to the position of Finance Minister who could deal with this current predicament and has a proven track record of having dealt with a previous similarly disastrous economic state of affairs.
Looks like a job for Roger Douglas!