Given nobody else seems to know what they are talking about, I thought I might as well share my opinion on the Global Economy.
In the eye of the global economic crisis, Governments rushed out and pumped a ton of money into their economies. This stimulus has arguably done its job and Governments (especially the US) are now under increasing pressure to reign in spending. Large deficits will not win them elections. As a result of tighter Governments spending, there will be room for global interest rates to stay low for longer than the markets are expecting.
Closer to home, the NZ economy is likely to stay fairly subdued with high unemployment and weak exports. The Agri sector from all accounts is in serious trouble with low prices and high debt levels. And our exporters and Tourism will continue to face a strong NZ dollar.
With such a soft underbelly and constrained Government spending I struggle to see why the Reserve Bank would need to hurriedly increase interest rates. The negative impact on the Agri sector in particular, and on struggling exporters to a lesser extent, would far outweigh the benefits of tightening monetary conditions.
The key risk (already starting to play out) from low interest rates is increasing asset prices – in particular house prices. The Reserve Bank wants to keep interest rates low, but it also wants to stop house prices from forming a new bubble.
I think the Government and the Reserve Bank will try to do this through policy settings rather than pushing interest rates up far too early. In recent weeks there has been a significant increase in discussion on Capital Gains Tax and Land Taxes. I’m not surprised. From what I can see there has also been more focus on how to reduce building costs, which is long overdue.
My view is that some form of Reserve Bank or Government policy will be a likely outcome of needing to keep interest rates low.
Although the housing market is running hot at the moment I suspect it will cool off a bit in the New Year. There is still a bit of a hangover from 2008 and there was a shortage of listings going into Spring. A lot of the buyers we are helping have been in the market for 12-18 months but just getting the confidence to buy now.
Banks are still fairly tight on lending especially to property investors, business owners, and self-employed people. (In the last boom I estimate this was probably as much as 50% of the activity.) And across the board bank servicing calculations are tougher than they were in 2007. Reduced access to credit will fundamentally constrain property price growth.
