The visible hand in economics

Archive for the ‘Australian economics’ Category

The Reserve Bank of Australia cut 100 basis points last night taking the cash rate to 4.25% – well into easing territory.

A feeling that global commodity prices were in for a sustained lower period was a driving force behind this stimulus.  Surprisingly the Reserve Bank of Australia did not mention to enormous decline in fuel prices – however, there suggestion that the terms of trade would fall markedly implicitly suggests that the decline in petrol prices will be dominated by other factors.

What does this mean for New Zealand – a rule of thumb stemming from cuts so far (Aussie cut + 25) would suggest 125bp.  100 is still conceivable, as is 150.  My pick of 75 now seems incredibly unlikely.  Note, further discussion of the decision occurs in the comments of this post :)

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Apparently the Aussies are blaming Fonterra’s Global Dairytrade online auction platform for lowering the price of milk.

Interesting. If the auction is simply reflecting the true value of milk then the I feel no sympathy. This quote from the manager of the auction system sums up it’s purpose

Fonterra’s global trade managing director Kelvin Wickham said the auction was all about “the international market getting a transparent price” and all global dairytrade was doing was “making it more transparent more quickly”.

As an economist that is music to my ears. On the other hand here’s the quote from the Aussies

“Given things are bleak with the economic outlook, people are holding back on purchasing to see what happens with the auction,” Ms Bills said.

“Mostly, the price doesn’t recover. It is fine to want to have a transparent price system, but why not open at the closing price? If you put a price out there for something in an auction, people see it as a reserve.

“Buyers are waiting to see the price from the auction before they make their purchase.”

So basically they want the auction setup so that it props up the price of milk, can’t say I really have much sympathy for that view….

Following today’s terrible house price figures (I don’t have to see them to know they would be bad :P ) I thought it would be appropriate to go back to the comparison of NZ (and Aussie) to the US – at least for housing.

Greg Mankiw links to an article in the Wall Street Journal.  Read this:

When Australians borrow money to buy a house, they know that if they default and the mortgaged property doesn’t cover the debt, they will be responsible for the shortfall. And the lender will chase them for it. It’s a neat way of reminding Australians to borrow responsibly.

In America, where populist post-Depression laws in many states have mandated loans be nonrecourse, the opposite is true. Americans can take out a mortgage more or less as a one-way bet. If you can’t afford the repayments and can’t refinance, you just send the keys back to the bank. Borrowers wipe their hands of liability.

Surely hearing how moronic lending practices are in the US makes us all feel better about the relative outlook for our banking and housing sectors.  Although I bet to spite me that a major Aussie bank has gone bankrupt while I’ve been out of the country ;) (again this was written on Sunday Nov 2)

100 basis points slashed by the Reserve Bank of Australia. There cash rate is now 6%. A 50 basis point cut was expected, 75 seemed possible, 100 is epic.

At the start of the recent freeze in credit markets a 75 basis point cut by the RBNZ seemed highly unlikely – but possible. Now a 75 basis point cut is looking increasingly likely – and 100 basis points also seems possible. To put this in perspective – the Bank may have felt that a 50 point cut in October was on the cards following the September cut. Financing costs have now moved up so much that it is (sort of) like the previous cut never happened – implying we need a 100 basis points of cuts just to get where the Bank was aiming, maybe :P

Does this indicate that the economic situation for Australiasia has deteriorated rapidly – yes and no.

Read the rest of this entry »

Over at Anti-dismal, Paul Walker links to a paper by NZIER on New Zealand incomes relative to Australia.

In the paper, NZIER states that:

the average living standards of New Zealanders in 2007 were 24% lower than those of Australians (or equivalently, relative to living standards in New Zealand, Australia’s were
32% higher)

However, I am not convinced – not yet anyway. Here’s why:

Read the rest of this entry »

The RBA lowered the official cash rate to 7% yesterday, while GDP growth was a measly 0.3% over the June quarter. It appears likely that the RBA will cut rates again in October and further cuts following that cannot be ruled out.

Given that this is the case I am not going to comment on the fact that the majority of economists in Australia appear to be painfully dovish (excluding the insightful commentary from Dr Stephen Kirchner of course). I am instead interested in how falling Australian interest rates, and weakening Australian growth (assuming that it says weak over the coming couple of quarters) impacts on the NZ economy.

Lower interest rates in Australia will directly lower demand for Aus dollars, as our dollar likes to hang out with the Aussie dollar, this is likely to dampen demand for NZ dollars as well – weakening our currency. Think of it this way: We are a small economy that people don’t know much about, however people assume that as we are next to Aussie we must be moving in a similar way – as a result, changes in the Aussie economy and interest rates give people (perceived) information about the NZ economy (specifically given that both currencies are strongly related to movements in commodity prices).

On the straight economic growth terms, a slowing domestic Australian economy is no good for us. Looking at the latest merchandise trade figures (July) we are told that over the last 12 months, exports to Australia accounted for 23% of total exports – much larger than the second biggest destination (USA at 10%). Although this figure has become inflated with “intermediate goods” (crude oil to refineries in Australia) it still indicates that a slowdown in Aussie could hit our exports hard.

Overall, we need to keep an eye on our big neighbour to the east – big new over there will probably be big news over here as well.

The recent Sonny Bill Williams saga has brought into light the issue of salary caps in competitive sport. After fleeing the Australian NRL for French Rugby Union, SBW made the claim, among many other bizarre excuses, that the NRL’s salary cap was anti-competitive, in that it prevented players from earning their full-potential.

Does SBW have a valid point?

Read the rest of this entry »

Well to be honest, the Reserve Banks know a lot of things I don’t – but it appears that maybe they have some access to information that I am not aware of.

Yesterday, the Reserve Bank of Australia turned even more dovish than it had been earlier – spelling out the fact that it was going to start cutting interest rates soon (here). Similarly, the RBNZ began cutting from July 24th in a statement that seemed to indicate that interest rates were going to be progressively cut over the rest of 2008 (here).

Now both Bank’s admitted that inflationary pressures were rife – however, both banks have also presumed that wage pressures and inflation expectations will moderate. This is the kicker – price and wage claims must moderate, and both Bank’s appear to have a reasonable amount of confidence that they will.
Read the rest of this entry »

An excellent current affairs column by Dr Stephen Kirchner of Institutional Economics (*).

For all my bleating, the inflation problem in Australia is considerably worse than it is here, just look at this:

Excluding the transport group from the CPI, the component most directly affected by higher oil prices, still yields an inflation rate of 1.2 per cent over the quarter and 4.1 per cent over the year

Damn. For people interested in the data the CPI stuff is here, and the all important labour market stuff is here (note that unemployment fell in Aussie!).

Next weeks labour market data will be all important for us here in New Zealand – I’m still picking that the economy will pick up from about September, just soon enough to prevent non-tradable inflation from easing sufficiently. If September quarter GDP rises by less than 0.5% (with an equivalent fall in June), I might have to take that back – but we won’t get those numbers till December :)

Following the freezing of Hanover finance’s finances we have heard that the National Australia Bank, and the Australia New Zealand Bank have both had to increase provisions for bad debt (NAB, ANZ).

These revelations put the relatively dovish stance of the RBA and the RBNZ in perspective – after all, central bankers are more than aware of the fact that the Great Depression was, at least partially, the result of a collapse in the banking sector which exacerbated a tightening in credit conditions. In a sense, the credit crisis in Australasia is now as bad as it has been in modern times – even if (arguably) things are improving in other parts of the world.

Even so, every time I attempt to pat the RBA or RBNZ on the back a couple of phrases come in the back of the head and prevent me, these phrases are “moral hazard” and “inflation”.

Read the rest of this entry »

Before all our cash rate excitement Australia also had a cash rate review and a GDP release.

The cash rate review came first. The tone appeared similar to both the April (*) and May (*) cash rate reviews in that it was moderate. Fundamentally the statement said that as long as domestic demand showed further signs of moderating, further interest rate hikes would not be required.

Now the market reacted poorly to this – many analysts were expecting the Australian cash rate to head towards 7.75 given the prevalence of inflation in Aussie. However, I’m not sure if the Bank was saying that rate hikes were off the table – they were just saying that if the sharp slowdown in retail sales continues, true underlying inflationary pressures will fall.

However, with the labour market tight, the March GDP figures will have the RBA closer to reaching for the trigger in July.

Read the rest of this entry »

Yesterday the Australian’s left their official cash rate unchanged at 7.25%, 100 basis points lower than our cash rate. The rate has been on hold since March, but the overall feeling is that the bias is still towards further tightening – especially with the inflation rate at 4.2%.

However, the evolution of the statement between March, then April, and finally in May has been interesting. Beyond all the fluff involved in each statement one underlying factor has been key for the medium term outlook in the RBA’s mind – the strength of domestic demand. The language associated with with domestic demand has changed significantly over the months, in March: Read the rest of this entry »

Yesterday the Reserve Bank of Australia lifted their official cash rate to 7.25%, only 100 basis points off the New Zealand rate. The accompanying statement is here.

I’m still unsure about how to read these new RBA statements – they are a little less focused than the RBNZ ones, often trying to focus on as many issues as possible.

The bit I look out for is when they say “a significant slowing in demand from its pace of last year is likely to be necessary to reduce inflation over time”. This implies to me that they might lift again soon.

However, they said this in both statements.  The best comparison comes from looking at the last paragraph in both statements:

Read the rest of this entry »

The Reserve Bank of Australia lifted its cash rate to 7.0%, on the back of higher than expected inflation outcomes.  In the statement, Governor Stevens stuck firmly to the uncertainty line while admitting that even this lift in rates may not be sufficient to tame inflation.  Continued strength in domestic demand is likely to push them to increase rates again.

For New Zealand this implies a narrowing of the yield gap between Aussie and NZ.  As a result, the relative value of the NZ$ should ease, helping exporters.  A lower cross-rate with Australia then gives the RBNZ one less reason not to increase rates, increase the probability that the Bank will lift rates to 8.5% over the coming months.

The Reserve Bank of Australia kept their target cash rate on hold yesterday. In a push to increase transparency, they now release a statement with every decisions, which is awesome. Yesterday’s statement was relatively neutral, however as my esteemed colleague CPW says, there is nothing to compare it too so its hard to tell exactly what the statement means. My guess is that the Bank is happy to stay on hold, until the risks associated with subprime worries in the US calm down.

At the same time the September GDP result came out, with a 1.0% seasonally adjusted increase in the September quarter, taking average annual growth to 3.4%. Although 1.0% for a quarter seems high, CPW informed me that this is what the market expected, and furthermore the growth in previous months had been revised down.


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