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.

Bollard Speech Front Page News

Alan Bollard’s speech here at the Chamber dominates the front page of today’s Dominion Post.  Here is the press release we issued following the speech yesterday:

Bollard Repeats Call for Local Government Constraint

 

Mr Bollard told a business audience of more than 100 at the Wellington Regional Chamber of Commerce today that if lower interest rates are to be sustained, all sectors of the economy need to play their part in reducing inflationary pressures.

 

Mr Bollard singled out the energy, transport, food, banking and local authority sectors as needing to avoid passing on costs.

 

“We expect competitive pressures will act to keep prices down in many of those sectors but we agree with the thrust of Mr Bollard’s message that some parts of the economy are slow to reduce prices in response to reduced demand,” said Chamber CEO Charles Finny.

 

“One sector not exposed to competitive pressures which we are particularly concerned about is local government. 

 

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

 

“Mr Bollard said that local authorities need to set rates increases below inflation for a change.

 

“The consequences of local government excesses are not only excessive rate increases but potentially higher interest rates as well. 

 

“The main thrust of Mr Bollard’s argument is that for New Zealand to sustain lower interest rates, inflation needs to be reduced.  We argue that government also has a role here.

 

“Businesses facing tight margins and competitive pressures will welcome the call for lower costs to be passed on,” Mr Finny concluded.

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. 

 

 

OCR Announcement

We have no particular insight on this morning’s decision other than the insight that economic conditions continue to deteriorate.  But I can observe that if Bollard doesn’t go the full 150% then he will have undershot many expectations out there. 

The key after ths announcement is to ensure that the lower interest rates are passed on quickly to business and household borrowers.  To date the OCR falls have not had that much impact on businesses.  Government should be making clear its expectations on this as a quid pro quo for the guarantees, particularly that on wholesale market borrowings.

Bollard is speaking to our members next week.