Article: Property Investment
Interest Rates In 2012 with Frank Newman
In his latest interest rate commentary (8 December), Reserve Bank Governor Alan Bollard pointed to dark clouds on the 2012 horizon. “Global developments are having some negative impact on New Zealand, though to date it has been limited. Business confidence has declined and investment spending is likely to remain weak for some time. In addition, tightness in international markets means funding costs for New Zealand banks will increase to some degree over the coming year… There remains a high degree of uncertainty… and there is a risk that conditions weaken further.”
The main concern is of course Europe. The key issue is whether it can avoid a serious recession that will have knock-on consequences for the world economy. The credit rating agency Fitch, believe recession is likely and is about to downgrade the credit rating of at least six European countries, including France. That will undoubtedly test the generosity of the French and German taxpayers to continue funding welfare payments to neighbours, whose company they don’t particularly enjoy.
Some say people get the governments they deserve and perhaps the people of some European nations were foolish to believe overspending would not have consequences. While the people of Europe are now paying the price for electing and benefiting from profligate politicians, I am not sure they deserve the human consequences of recession and poverty. The chances of deep recession in Europe are about 50/50. So what would be the likely effects on us should Europe go down the dunny in 2012?
A fall in our commodity prices would affect our export industries, overseas funding costs would increase (60% of our finance is sourced from overseas), and the government will be forced to become more austere about government spending to balance falling tax revenues.
Allan Bollard puts it more precisely when he says, “A sharper-than-expected contraction in euro-area activity would materially reduce activity in other regions, including Asia and Australia. This would occur as a result of a marked deterioration in financial conditions, global trade and commodity prices. With limited scope for additional fiscal or monetary support in many Northern Hemisphere economies, global activity would remain weak for an extended period.”
He goes on to say, “Weakness in global economic conditions would inevitably result in weaker activity in New Zealand, and GDP growth would be much weaker than assumed in the central projection. Export demand and commodity prices would decline sharply. There would also be a reduction in domestic demand, with particular weakness in business investment spending. In addition, increases in risk aversion would result in a further tightening in term funding markets, which could exacerbate the downturn in domestic activity…. The New Zealand dollar would also fall, moderating the impact of the downturn in global demand on the export sector, but adding to near-term tradable inflation.”
Should this scenario play out, Dr Bollard indicated interest rates would remain low for some time, but even lower interest rates would not be enough to avoid a weakening in the domestic economy.
With this uncertain outlook, a rise in interest rates is increasingly unlikely so my guess is those on floating mortgages may as well stay floating for the immediate future anyway. Interest rates are likely to rise when our economy recovers, but that seems a way off yet.
Frank Newman is the author of numerous books on investment matters and the creator of the NZ Investment Game which may be ordered at http://www.investmentgame.co.nz. He is a director of the accounting firm Smart Business Centre. He may be contacted at .(JavaScript must be enabled to view this email address).
