Australian June GDP and interest rates: What does it mean for NZ?

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.

$onny Bill Williams and the salary cap

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?

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Australiasian Reserve Banks: Do they know something we don’t?

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.
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Institutional Economics column 26/07/2008

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 🙂

Credit crisis comes to Australasia?

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”.

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Australia: June cash rate review and March GDP

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.

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