KEY POINTS:
How worried should we be? What does the credit crunch mean for the cost of our mortgages, the safety of our jobs and how is New Zealand placed in the longer term?
We asked Peter Conway, Council of Trade Unions economist and director of policy; Stephen Toplis, BNZ
head of research; and Professor Tim Hazledine, Auckland University's head of economics.
The BNZ characterised the bunch of economic conditions we face as "an almost perfect storm". Afflictions include the global credit crisis bestowed by the United States' greed and folly, a weakening world economy and at home, rising commodity prices, a housing market slump, high interest rates and a drought.
We do have a dairy sector commanding record prices, trading partners that include the strongly-growing economies of China, India and oil-producing nations and our Australian and British-owned banks don't have a sub-prime situation like the US where loans were given to those who couldn't afford them.
WHEN CAN I EXPECT MORTGAGE INTEREST RATES TO COME DOWN?
Hazledine: No imminent mortgage rate relief. Having an inflation target of no more than 2 per cent as a solitary goal doesn't help mortgage affordability, is dated and unrealistic. "We are entering an era where prices have to go up for many things. Resource scarcity and environmental damage have to be priced. We need an economic policy system that can encompass that instead of just trying to batter other prices down."
Toplis: Predicts an arm-wrestle between the Reserve Bank (likely to lower the cash rate) and banks (which will pass on to customers their increasing cost of borrowing overseas). "Banking is a very simple business. You borrow from somebody to lend to somebody else and you place a margin in between. At the moment the banking sector's margins are being squeezed strongly because of this increase in the cost of funds from overseas."
A reduction in mortgage rates is possible later this year or early next but the majority have fixed interest mortgages and those rolling off them in the next 12 months face paying up to 1.5 per cent more than when they fixed them.
FIXED OR FLOATING MORTGAGES?
Those pushed to the limit may need the certainty of fixed for a longer term while those who can afford to gamble might take the risk that rates will likely be lower in 12 months and fix meantime for six, nine or 12 months.
Conway: Would like to see the Reserve Bank cut the official cut rate by 50 basis points at its next review to ease pressure on mortgage-holders. "There are some upside risks on inflation but there is a bigger issue here. A quarter is not enough, half sends a strong signal and might do something to [moderate] the currency."
Otherwise the Reserve Bank's next opportunity is in June, two weeks after the Budget and "I think then we are going to be in a much more difficult environment to look at this".
WILL IT BE A SOFT OR HARD LANDING?
Hazledine: "To quote another economist [Galbraith], economists make forecasts not because they know but because they are asked."
But he says he's cautious in the short-term and optimistic in the long-term, so long as we don't panic. "We have come out of an era of irrational exuberance and we are now in danger of going into an era of irrational gloom. The problem is that these things can be self-fulfilling."
If too many are fearful, money stops going around. John Maynard Keynes taught us that lesson after the Great Depression and then the war, which they spent their way out of. Since globalisation, central bankers and finance ministers have acted quickly to stop these things unravelling.
"But it is a bit different now because the Americans have been so greedy that they created a micro-economic pond of mispriced assets. The US led the world in trying to make money out of dodgy financial assets by repackaging them and covering them up and taking huge sums out for themselves along the way. I think they have done a lot of damage."
Toplis: Expects the trough of the economic cycle to be in the second half of this year and whether it be a softening in growth or a mild recession (as his bank forecasts) he believes it will last at least until late 2009. "In six months it will be more restrictive. We haven't seen the bottom in the housing market, in consumer spending and we certainly haven't seen anyone laid off yet."
But New Zealand is relatively well-placed to cope. Our allies are a strong labour market and agricultural sector, reasonable wage growth, solid government spending on infrastructure and general development, a business tax cut (begins April 1) and a proposed personal one down the track.
The Reserve Bank has plenty of room to move compared to its US counterpart. "If Armageddon hit here, it could take 2.25 per cent off and still have a cash rate that is at neutral [5.5 per cent to 6 per cent equates with an equilibrium economy].
NZ's cash rate is 8.25 per cent compared to the US, which will soon be down to 2.5 per cent. "That doesn't leave a lot of wriggle room [for the US]." The reason Japan's last deflationary period lasted so long was in part because its very low interest rates tied the hands of its central bank.
A significant cut to NZ's cash rate would send the NZ dollar tumbling, which would give a huge boost to businesses. "We have plenty of ammunition."
Conway: A slowdown with some sector unevenness but not a crash or a heavy bounce. Mitigating factors include dairy and some other sector companies continuing to do very well, a strong labour market with reasonable wage increases, a reasonable response to Kiwisaver, and tax cuts (business and personal).
He guesses the latter will be announced in the Budget and take effect about October. "The pain is around food, petrol and housing."
The risk is contagion from international markets (our biggest export markets in order are Australia, US and China) but there is room to move in terms of Government spending and cutting the cash rate.
IS MY JOB SAFE?
Toplis: Though there is greater vulnerability to a rise in unemployment there is no sign at this stage of widespread layoffs. But that can change quickly and may depend on the depth of the slowdown and the sector you work in.
Real estate jobs may already be at risk and the retail sector (where spending is already falling) may shed jobs. It is uncertain how much of a slowdown is needed before companies have excess staff. "Our central forecast is that it would take quite a dramatic slowdown. We think there will be a very modest reduction in employment."
Hazledine: The labour market is far stronger than the last time [1998] that New Zealand had a technical recession (two or more quarters of negative growth). The unemployment rate was about twice what it is now. Some people may be nervous about their jobs but it just doesn't look like your typical recession type situation of high unemployment.
Conway: Very modest increase in unemployment later in year. Discretionary spending sectors, such as tourism and retail, more at risk.
