Recession Not Quite As Bad As We Thought?

The just released September quarter GDP figures confirm that we were in recession but it was marginally less bad than most were expecting.  Dr Bollard, when I was last talking to him suggested that the December quarter may be better than September and that next year we might be out of recession.  We shall see.  Alan did confess that all the risk was on the downside.  Export performance and a flatter than expected Christmas retail performance (judgeing from sales data to date) suggest to me that any growth in the December quarter will be a very good outcome.  I am still picking a shallow recession until the start of 2009.  In the circumstances I favour a further, but more modest, cut in the OCR in January.

Yet More Holes Appearing In European Emissions Trading Scheme

This from this morning’s Financial Times

Businesses covered by the European Union’s emissions trading scheme are following talks this week among member states on its future operation.

At stake is the extent to which they will have to buy carbon permits at auction rather than get them free, as most have until now. The European Commission wants to phase in auctions between 2013 and 2020, with the idea that most companies would pay for all or almost all their permits by 2020.

But business lobby groups are pressing for concessions to reflect the economic downturn, and some are likely to be granted. They want more free permits, particularly for industries judged at risk from international competition.

Companies making steel, cement and paper, among others, have been pressing for special treatment. But the extent of the threat of “carbon leakage” – the closure of operations in regions with strict emissions regimes and migration to more lax jurisdictions – is hotly disputed.

The Commission is not expected to rule on which sectors are most at risk of carbon leakage until 2010.

Ten sectors are expected to be covered by the scheme in 2013: electricity generation; oil refining; iron and steel production; cement, clinker and lime production; glassmaking; brick and tile manufacturing; pulp and paper production; aluminium; ammonia production and petrochemicals, and aviation.

And officials here can tell Ministers with a straight face that we can’t change our scheme because of a backlash from Europe………………

EU Carbon Price Dives

There is an interesting article on the price of carbon on the European market in today’s Financial Times.  My gut feeling is that it will fall further as more European countries try and water down the impact of the scheme (already far less rigorous than that implemented by the previous Government).  I do hope that Peter Dunne ensures that the select committee has a good look at the European scheme as a possible role model for the New Zealand scheme.

Carbon prices have fallen precipitously in the past six months, reflecting the financial crisis and recession.

The cost of a permit to produce a tonne of carbon dioxide under the European Union’s emissions trading scheme topped €30 ($38) over the summer, but since then has halved and now hovers near €15-€16.

OCR Decision

The following is our reaction to the decision to drop the OCR by 150 points:

Businesses will be pleased that the Reserve Bank has reduced the official cash rate by an unprecedented 1.5 percentage points, says the Wellington Regional Chamber of Commerce.

 

“Today’s cut continues the much needed downward path in interest rates.  It will provide a solid boost to business confidence and give us the chance to return to growth next year,” said Chamber CEO Charles Finny. 

 

“It is essential that banks pass on the lower wholesale interest rates to their customers if today’s move is to have the desired impact on economic activity.

 

“The fact that the Reserve Bank Governor specifically asked financial institutions to do this, and drew attention to widening bank margins in the process, is significant. 

 

“We are pleased some banks have already responded and urge the rest to act immediately in this regard.

“It is also significant that in discussing the outlook for monetary policy, once again the Bank has drawn attention to local government rates as a source of domestically generated inflation. 

 

“We are pleased that some councils are taking steps to cut costs and constrain rate increases and we urge others to do the same.

 

“The Reserve Bank has made it clear that the consequences of local government excesses are not only excessive rate increases but potentially higher interest rates as well,” Mr Finny concluded. 

 

 

Free Trade And The Global Financial Crisis

I was rather disturbed by a few articles in this morning’s NZ Herald.  I will leave comment on the state of the airforce,disaster preparation plans and ACC to others, but I will focus on an article on page C5 by Barrett Sheridan which the Herald has lifted from Newsweek.

In this article Sheridan quotes a number of luminaries – such as Paul Krugman who suggest that because protectionism is relatively low freer trade isn’t going to make much of a difference to the global economic situation.  This I accept, but with the 1930s in mind I personally believe that freer trade is a goal that will send the right messaging about keeping markets open.  The article sort of accepts this, but the following paragraphs really annoyed me

Probably the most influential voice making this argument is Dani Rodrik, a Turkish economist at Harvard University. “We have a perfectly open trade regime,” he says. “In no sense does it keep any country behind in terms of restraining its growth potential.” The “astounding” changes in developing world tariff rates—down from 100 percent to 12 percent in India, for example—mean that most of the low-hanging fruit of trade negotiations has already been picked, says Rodrik.

New trade deals fail a simple cost-benefit analysis. Dropping tariff barriers and other forms of protection requires a highly complex piece of international choreography—the world’s trade representatives have been at work on the Doha round since 2001, for instance, and still have no agreement. And the potential benefits might not be earth-shattering enough to warrant all the trouble. In a 2005 study, the World Bank reported that if trade were completely liberalized overnight, and agricultural subsidies (a sticking point in the Doha talks) completely eliminated, the world would be better off by about $287 billion by 2015—an increase of just 0.7 percent of global GDP. The benefits from the Doha round, which has humbler goals than complete liberalization, are far lower, ranging from as much as $119 billion to as little as $18 billion. The latter number represents just 0.04 percent of GDP.

The article goes on to talk to Bhagwati who does his best to debunk some of this rubbish – but he is too polite really.

As New Zealanders we know that we don’t have a free market out there.  We also know that our potential is being held back by protectionism in a number of markets – Japan, EU, US and Canada are good examples.  We also know that one of the most damaging policies to have been used in international trade – export subsidies – was not that much of a problem in recent times due to high commodity prices.  But with these settling back- in some cases quite sharply – these could become a significant problem again.  This WTO Round offers the chance to abolish these policies once and for all.  Domestic subsidies are also a major issue.  We saw how they caused such major distortions in global food supply when they were misapplied to the biofuels area.  These too can only be addressed properly in the WTO context.  While the EU, US, Canada and Japan might not be feeling pain because of trade policy protectionism, we are and the countries of sub-Saharan Africa are, and some in Latin America are.  For this mix of countries an outcome from the WTO negotiations is just the tonic needed to help get through the forthcoming financial crisis and allow an improved export environment to allow growth to occur again….

Is The Government’s Policy Prescription Enough?

Fran O’Sullivan asks some important questions of our new Prime Minister and Deputy Prime Minister in today’s NZ Herald:

During the election campaign Key clung to the notion that National’s “well-structured economic plan” would ensure the New Zealand economy is hermetically sealed from the global shocks.

But he should now be assessing whether National’s impending tax cuts package, infrastructure spending proposals and mechanisms to help newly redundant workers will be enough to stave off the worst effects of the crisis here and pave the way for New Zealand to move out of recession by 2010.

In the post below I report on an update of these policies provided yesterday to the NZCCI Conference by Bill English.

The answer to Fran’s question is obviously “no”.  But that said the policies are very much heading in the right direction.

The Government is very new and is still getting to grips with the enormity of the challenges it is being confronted with.  This is something of a shock to some Ministers.  Clearly more policy will need to be introduced, but I am comfortable that we are not seeing policy responses being rushed.  We already have a good example of what can go wrong if policy is rushed in the form of the Government guarantee of deposits in banks and some other financial institutions.

I guess that I am in something of a privileged position.  I have met John Key and Bill English (twice) since the election.  I have also met with of talked to a number of the other Ministers in the new Government.  These have been detailed discussions.  I am absolutely convinced that the new Government wants to meet the immediate challenges of the financial crisis and to get the economy growing again.  Much in the same way as Fran O’Sullivan seems to be challenging.

As Bill English has outlined to the media, October’s tax cuts, Government expenditure increases and the April tax cuts will put another $7 billion into the economy.  In an economy of this size this is a significant stimulus.  On top of this we have the stimulus that will come from the last and next cuts in the OCR by the Reserve Bank.  Our interest rates are still quite high compared to other economies of our type.  This means we can use this mechanism to stimulate the economy in a way that the US, Japanese and many European economies can’t.  This is a huge advantage.

What we have seen announced will not be enough, but I am confident that over the next few weeks more policy will emerge that will improve our policy response to the crisis further.  We will need these improvements because I think that things are going to be much worse post-Christmas.  I have real concerns about retail and I expect a substantial rise in unemployment.  But with increasingly better policy, with low interest rates, and with a healthy banking sector that is still willing to support good companies and ideas, I think we can get through this challenge and get the economy growing again.  To achieve this we will need a vastly improved export performance and stronger productivity growth.  These topics will be key themes for Dear John, and I hope the Government, in the weeks ahead.

APEC Leaders Issue Lima Declaration

APEC Leaders have just released their declaration for 2008.

Much is being made in the New Zealand media about the commitment to achieving a breakthrough in the WTO negotiations this year.  Certainly we are delighted by what we have heard John Key and Tim Groser saying on this at this year’s APEC meeting.  The language on the WTO is not as specific as we would like but it does emphasise ambition and balance.  This is important as the agreement is needed in all areas of the mandated negotiations not just agriculture and non-agriculture market access.  That said we would have been happier with a specific reference to services (as was achieved at the G20 meeting)

Our resolve to address the deteriorating global economic situation, and support a prompt, ambitious and balanced conclusion to the WTO Doha Development Agenda (DDA) negotiations, is outlined in a separate statement issued at this meeting.

We guess some of the concern might be over the word “prompt” as opposed to the firm goal of “this year” as used by the G20 Leaders last week.  But reference is made to the separate statement issued by the Leaders on the global economic situation and on the WTO negotiations.  This did refer to agreement on modalities “next month”

We seek an ambitious and balanced conclusion to the Doha Development Agenda negotiations to provide the basis for our economies to grow and prosper. We are committed to reach agreement on modalities next month on the basis of progress made to date. We and our Ministers are intensifying our engagement with WTO counterparts to create the convergence necessary to achieve this outcome.

For comparison this was the G20 language

13. We underscore the critical importance of rejecting protectionism and not turning inward in times of financial uncertainty. In this regard, within the next 12 months, we will refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organization (WTO) inconsistent measures to stimulate exports. Further, we shall strive to reach agreement this year on modalities that leads to a successful conclusion to the WTO’s Doha Development Agenda with an ambitious and balanced outcome. We instruct our Trade Ministers to achieve this objective and stand ready to assist directly, as necessary. We also agree that our countries have the largest stake in the global trading system and therefore each must make the positive contributions necessary to achieve such an outcome.

The main difference of emphasis between the two meetings is the word “committed”.  APEC Leaders are committed to reaching an agreement on modalities next month.  The G20 agreed only to “strive to reach agreement this year”.

APEC Leaders Issue Statement On Global Economy

APEC Leaders have issued a statement on their response to global economic difficulties in advance of their fuller statement on the full APEC agenda.  The continuing commitment to finalising modalities in the Doha Round and a commitment to a 12 month standstill on new protectionist measures is particularly welcome.  Likewise the focus on export credit is helpful.  Many of our members are finding that their customers offshore are re-negotiating terms and seeking very long term periods (180 days or more) for payment.  Here is the full statement

We, the APEC Economic Leaders, began our 16th Meeting in Peru on 22 November with a discussion on the impact of the global financial crisis and the actions APEC members are taking, individually and collectively, to restore confidence in our economies and maintain our region on a path of long-term growth.

We have already taken urgent and extraordinary steps to stabilize our financial sectors and strengthen economic growth and promote investment and consumption. We will continue to take such steps, and work closely, in a coordinated and comprehensive manner, to implement future actions to address this crisis. We will also support efforts by export credit agencies, international financial institutions (IFIs) and private banks to ensure that adequate finance is available to business, including small and medium-sized enterprises, and to keep trade and investment flowing in the region.

The current situation highlights the importance of ongoing financial sector reform in our economies and the valuable role played by APEC’s financial sector capacity building work. We welcome continued development and innovation in the financial sector and believe that as financial systems deepen and become more complex, regulatory and supervisory tools must be more effective. The crisis also highlights the need to develop more effective standards of corporate governance and risk management as well as the importance of social responsibility in the financial sector.

We welcome the Washington Declaration of the leaders of the Group of Twenty at their Summit on Financial Markets and the World Economy and strongly support the common principles that will guide the Action Plan for financial markets reform. In this regard, we strongly support the broad policy response needed to restore global economic growth and stability through: closer macroeconomic cooperation; avoiding negative spillovers; supporting emerging and developing economies; and comprehensively reforming and strengthening the IFIs to reflect the increasing voice and representation of emerging and developing economies and be more responsive to future challenges. We reiterate our firm belief that free market principles, and open trade and investment regimes, will continue to drive global growth, employment and poverty reduction.

We recognize that the International Monetary Fund (IMF), the World Bank, the Asian Development Bank, the Inter-American Development Bank and other multilateral development banks have a critical role in assisting economies affected by the financial crisis and require sufficient and readily available resources. The IMF, with its focus on surveillance, should strengthen collaboration with other IFIs, enhancing efforts to integrate regulatory and supervisory responses into the macro-prudential policy framework and conduct early warning exercises. We endorse the APEC Finance Ministers’ encouragement for our economies, where applicable, to participate in the IMF/World Bank Financial Sector Assessment Program taking into account the level of development and the specific conditions of each member economy.

There is a risk that slower world growth could lead to calls for protectionist measures which would only exacerbate the current economic situation. In this regard, we strongly support the Washington Declaration and will refrain within the next 12 months from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organization (WTO) inconsistent measures in all areas, including those that stimulate exports. We seek an ambitious and balanced conclusion to the Doha Development Agenda negotiations to provide the basis for our economies to grow and prosper. We are committed to reach agreement on modalities next month on the basis of progress made to date. We and our Ministers are intensifying our engagement with WTO counterparts to create the convergence necessary to achieve this outcome.

We reaffirm our commitment to the Bogor Goals of free and open trade and investment in the Asia-Pacific as a key organizing principle and driving force for APEC. We instruct APEC Ministers and officials to accelerate implementation of the measures contained in our Regional Economic Integration Agenda, including a possible Free Trade Area of the Asia-Pacific as a long-term prospect and intensifying work on structural reform. The current growth crisis will not shake our determination to address the important challenges facing the region including climate change, energy security and clean development, and the fight against poverty, hunger, disease and terrorism. We will stand by our international commitments in these areas, including in Official Development  ssistance and the Millennium Development Goals.