The business year starts gradually and, usually, nervously. This year is no exception.
On the first trading days last week currency and stock markets were thrown into turbulence by China, where trading was halted twice in three days, triggered by continuing falls in share prices. New Zealand stocks fell 0.8 per cent on the S&P/NZX50 index during those three days and the dollar lost 0.07c against the US. It was a reminder that no matter how robust our economy may be, it is not seen as a refuge of safety when international confidence is shaken by the likes of China. If the world's second largest economy is in for a hard year, so are we.
A drop in the dollar would be welcomed by dairy farmers, of course, who face continuing low prices and possibly a drought, unless the New Year's rain in the north has been sufficient to relieve that risk somewhat. A lower currency would be welcomed by the Reserve Bank, too, since it could generate some inflation if the prices of imports can be passed on to consumers. Some observers believe competition in the retail sectors may prevent the pass-on. For every possibility, there is a case for the contrary. The outlook is uncertain and business hates uncertainty. Firms reopening today will be sitting tight, probably thinking they could have stayed on holiday. It may take a few more weeks for the year to find its feet.
If China is a worry, the US is offering ground for optimism. Strong employment figures have endorsed the Federal Reserve's decision last month to start raising interested rates for the first time since the financial crisis. More rate increases are now likely, causing the US dollar to rise further against currencies such as ours. That would make it unlikely our Reserve Bank would need to lower its interest rate again for the time being, which is good news.
The only reason it lowered the rate last month was to try to lift inflation from near-zero into its 1-3 per cent target band. But it is hard to believe there is much risk of the rate falling below zero here. Many consumer goods decline in price as time goes on and people do not put off buying them. The greater risk in this country is that lower interest rates will stimulate house trading again, undoing the measures the bank and the Government have taken to cool the market in Auckland.
