Why are we still spending so much overseas?
Posted October 30, 2008on:
According to figures out yesterday, New Zealand corp has greatly increased its spending overseas over the past year. In part this seems crazy since we have been in a recession over the past nine months – however, there are reasons:
- Our exchange rate fell (assuming demand is inelastic – or is not passed on through intermediaries),
- The price of imports (specifically food, petrol, and intermediate goods like fertilizer) has risen,
- Businesses wanted to invest before our dollar fell below “fair-value”,
- Higher prices for our exports have made imports more affordable.
Note that the first two reasons solely drive the increase in prices – while the later two work through greater volumes of imports. When the terms of trade numbers are out we will be able to see which bit dominates 😉
Furthermore, our recession over the first half of the year was the result of a “temporary” shock – through petrol prices and drought. As a result of this, people in New Zealand will increase borrowing in order to “smooth” consumption over time – as the goods aren’t here, this involves borrowing to buy goods from overseas.
With the price and availability of credit now rising, and the exchange rate below fair value, I would expect import values to start declining – what do you guys think?