Year so far - brief break from storm

With the holiday heatwave proving a distraction from the global financial crisis, here's a quick catch-up on what's been going on. The year in review: 2009.

It hasn't been too bad. Stockmarkets have rallied and then slumped but not in an unpredictable or overly dramatic manner.

Credit markets have remained stable, easing ever so slightly - interbank lending rates are now at levels that haven't been seen since the days before Lehman collapsed in September. They are still too high - but not insanely high.

So there remain positive signs that the worst of the banking crisis may have passed. Unfortunately, the same can't be said of the economic situation. The fallout from the credit crunch continues to come thick and fast.

US employment was the kicker that turned Wall St into negative territory during the week. It was estimated that 2.4 million Americans lost their jobs last year - the highest level since 1945.

Oil spiked on concerns related to the Gaza conflict and then slumped when inventory data showed the US has more oil in its stockpiles than it can use any time soon.

Normal service has resumed. Normal service for this year looks like weak market rallies - on a "no news is good news basis" - followed by fresh falls as each new piece of grim economic data arrives.

The most worrying news for New Zealand in the past 10 days has been the extent of the continuing falls on world commodity markets.

Dairy is now off almost 50 per cent since its peak seven months ago according to the ANZ Commodity Index data for December - 54 per cent according to the more up-to-date Fonterra milk powder auctions.

That still leaves the price at a historically solid level - about what Fonterra was getting two years ago. But that point will wear thin if the price keeps dropping.

The ANZ Index showed that every one of the nation's major commodity exports fell in value last month (except apples, which aren't in season). That is the broadest drop since ANZ began collecting the data in 1986.

Compounding worries for the agricultural sector is the hot weather. The threat of drought has reared its ugly head again - particularly around the east coast of the North Island.

The lower New Zealand dollar is helping to offset the price falls for some commodities, although Fonterra's hedging policy presumably means it will be a few months before it starts to get the full benefit.

The dollar was off about 25 per cent last year and under normal circumstances the commodity data would have had it reeling even further.

But so far this year the kiwi has held steady at about US59c.

Currency traders say the effect of falling export prices will continue to be offset by our relatively high interest rates which make our dollar attractive to investors.

Alan Bollard has dropped the official cash rate at an unprecedented speed - from 8 per cent to 5 per cent in less than five months - and he is tipped to drop it again by either 0.5 or 0.75 per cent on January 29.

But with the US and Japanese rates down near zero and even the Brits dropping to a record low of 1.5 per cent this week, the margins for offshore carry trade investors still look good.

Bollard does have the nation well placed when it comes to interest rates. If the economy does get worse than predicted, there is plenty of room to drop them further, freeing up more cash for households and further dropping the dollar (which in turn helps exporters and tourism sector).

A lower dollar ought also to raise prices on those imported electronic goods that economists hate so much and encourage consumers to put their extra cash towards things that are more helpful for balancing our current account deficit - like investing in productive local companies.

As the US is finding out, the real problem is jobs. In the modern economy so many of them are based around consumer consumption that the big contraction in retail spending is going to be a painful process.

So thus far it has been a quiet summer break - at least by the standards of last year.

And that is a relief because it looks a safe bet things will be busy again soon enough.