The Softening of New Zealand’s Economy

Jupiter, Fla. (PRWEB) July 13, 2008

Jack Crooks discuses how New Zealand has historically had a strong economy and dollar but could soon be taking a shift in the other direction. Mr. Crooks takes a closer look at why New Zealand’s economy is softening.

New Zealand, known primarily for its agricultural activity and natural resources, has been quietly living the good life. Meanwhile, the central bank’s benchmark interest rate has made investing in New Zealand rather attractive. Over the last several years, the New Zealand dollar has appreciated quite notably versus the U.S. dollar. But this trend could be set to change. Allen Bollard, one of the Reserve Bank of New Zealand’s (RBNZ) governors, recently expressed the need for rate cuts, citing the five signs of the softening New Zealand economy.

New Zealand’s first-quarter GDP contracted for the first time since 2005.
Export volumes slumped 3.5% in the same period.
For the month of May, home sales fell to their lowest levels in 16 years.
Retail sales in the first quarter fell at the fastest pace in 11 years.
And the labor market is showing signs of rolling over with unemployment jumping 0.2% in the first quarter.

Crooks believes that monetary conditions began to ease at the start of 2009 because the state of monetary policy has been a big driver of New Zealand dollar strength. The benchmark interest rate of the Reserve Bank of New Zealand sits at 8.25%. That’s comfortably higher than the Reserve Bank of Australia (7.25%), the Bank of England (5%) and the European Central Bank (4.25%). And it’s considerably higher than the Bank of Canada (3%), the Swiss National Bank (2.75%), the U.S. Federal Reserve (2%) and the Bank of Japan (0.5%). However, there are two things are happening that could quickly reverse this appeal.

First, interest rates at the RBNZ need to come down. If they don’t, policy makers risk cutting off New Zealand’s economy to an even greater extent. When rates start coming down on a relative basis, then capital begins fleeing.

Second, even if central bankers start cutting the RBNZ interest rate, they’ve got quite a ways to go before they reach the level of most other major central banks’ rates. That could mean the New Zealand dollar maintains a bit of interest rate appeal. But even more money will flee if risk aversion takes hold of the markets.

“When investors are comfortable taking risks, borrowed money typically flows into high-yielding investments. The New Zealand dollar, at 8.25%, is one such high-yielding asset. But when investors become fearful, they begin running for the exits. If and when risk-takers give in to their fears, money that’s been stashed away in New Zealand dollar assets could quickly be yanked away. The result being notable depreciation in the New Zealand dollar,” Crooks states.

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