No Recovery Until 2010

Brian Fallow suggests in the NZ Herald that the economy is not going to have a happy 20o9 but that lower interest rates, the lower exchange rate and fiscal stimulus might have the desired effect by 2010.  To get there he sees more interest rate cuts and huge pressure for more stimulus on next year’s budget

With wealth evaporating, unemployment mounting and the grimmest global outlook for a generation, policymakers have not been standing idly by, either here or overseas.

New Zealand went into this downturn with just about the highest policy interest rates around, and correspondingly more room to cut them.

So far the Reserve Bank has cut the official cash rate 325 basis points, and with an OCR of 5 per cent Governor Alan Bollard still has plenty of rate-cut bullets left in his bandolier.

The financial markets are expecting another cut of at least 50 points, or more likely 75, on January 29, and some forecasters see the OCR hitting 3.5 per cent before he is done.

But the banks’ reliance on imported funding, in the context of a global credit crunch, will dilute the impact of domestic OCR cuts on retail borrowing rates and the availability of credit.

So the Government’s fiscal policy is expected to have to do more of the stimulatory work than it would during a milder recession.

The Treasury estimates that the cumulative boost from tax cuts and Government spending increases in the two years to June 2010 will amount to more than 5 per cent of GDP – hefty by historical and international standards. But by the time of the next Budget in May the pressure for more stimulus is likely to be strong.

“Eventually the mass of monetary and fiscal easing assaulting the economy will pay dividends,” Bank of New Zealand economist Stephen Toplis said. “But ‘eventually’ is the key word in that sentence … We are hanging out for 2010.”

What is beginning to worry me is what happens after 2010.  All this stimulus around the world must start flowing on into global inflation once economies start to recover.  All the more reason for New Zealanders to be reducing their personal and business debt levels now while interest rates are lowering. 



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