Jan 24, 2008

And Fallow Shows Why He Is Wrong

When you are up to your nostrils in debt, you hope no one makes waves. Brian Fallow has another article in the NZ Herald which raises similar concerns to those which we raised yesterday.

New Zealand sailed through the last US recession in 2001 relatively unscathed. Growth slowed to 2 per cent before picking up again.

But inevitably there are differences between then and now.

This time the wave crossing the Pacific comes at a time when the economic boat is lying lower in the water.

New Zealand is in the worst-of-both-worlds phase of its cycle, when growth is weak but inflation is still strong and monetary conditions extremely tight.

While the housing boom is clearly over, its legacy includes levels of debt for some households that will prove uncomfortable, if not untenable, in the context of a global credit crunch.
And with a gap of nearly 5 percentage points between our official cash rate and the average among the G7 economies, it would not be wise for exporters to count on any relief on the exchange rate front, heightened risk aversion notwithstanding.