What was the Reserve Bank thinking?

What were the Reserve Bank and many of New Zealand’s leading economists thinking – were they?

As predicted, the Reserve Bank’s July increase in the official cash rate (OCR) has taken the housing and productive sector into a perfect storm. A new recession is now brewing on the horizon.

The residential construction sector and the existing housing market are in very poor shape. August house sales and new home consents were down, yet again, and both surprised the economists – yet again. Why is it that the Reserve Bank gets it so wrong, when it comes to movements in the OCR?

Jennian Homes is calling on the Reserve Bank and the government to take a much stronger leadership role to restore consumer confidence in new home building and the housing market in general. Existing house prices and new housing activity are now falling. New home builders are facing the toughest times in living memory, and have been for years now. The Reserve Bank’s initial short to medium-term assumptions on GDP and housing growth were flawed and increasing the OCR in July has further damaged the existing and new housing market and other productive sectors of the economy.

Jennian Homes is now calling for an emergency reduction in the OCR of up to 0.5%, to assist the housing and productive sector, restore consumer confidence and lower the New Zealand dollar, particularly against the weakening US dollar.

“We need to protect the domestic (confidence) and export sectors (currency) of the economy before it is too late and we are back in recession,” says Jennian Homes director Richard Carver. “The actual numbers are now showing a fall in residential construction and house prices in general. Consumers are still holding back. They need more confidence to get them over the line. Increasing the OCR last July, did little to improve weak consumer confidence. The latest NZIER Quarterly Survey of Business Opinion shows the NZ economy is now in reverse with continuing weakness and the possibility of negative GDP growth in September.

“The government’s recent attack on residential property investors, GST and ACC increases have further undermined consumer confidence and residential construction activity. The early introduction of the Emissions Trading Scheme has increased petrol and electricity prices for all New Zealanders, at a time when we are all being told that we must save more.”

It is ironic that most of the inflationary pressures have been introduced by the government, through the GST and ACC increases and the Emissions Trading Scheme. Then the Reserve Bank raised the OCR in July to control the inflation the government introduced. We are heading into a perfect economic storm with rising costs, rising dollar, rising interest rates, falling net migration and falling consumer and business confidence.

The average Kiwi, in a non-essential job, is still hurting from the recession and the motivated ones are eyeing up the lucky country across the ditch. This will help improve New Zealand’s unemployment statistics and drain our talent pool, which no doubt the government will claim as a great policy. Australia continues to widen the economic and wage gap between the two countries, despite ongoing reassurances from the government. The July 0.25% increase in the OCR was, as predicted, premature and unwarranted. The associated appreciation in the NZ dollar of more than 10 cents, or 15% since the first OCR rise, will only make the recovery longer and harder for all Kiwis, especially primary exporters, the backbone of our country.

Globally things still remain uncertain. New Zealand’s GDP grew by a paltry 0.2% in the June quarter and will probably be negative in September. This puts New Zealand back in the recessionary zone – hardly the environment where the Reserve Bank should be raising interest rates. The Reserve Bank’s previous (now revised) annual GDP growth predictions of 3.7% were grossly optimistic (wrong).

Slowing immigration and the grossly optimistic view on pent up housing demand by many of New Zealand’s leading economists will prove (if it hasn’t already) that the timing of the July OCR increase was flawed. The predicted housing shortage, at this stage, appears to be just a myth, as every departing Kiwi, mostly heading for Australia, will tell you, along with the 20-plus-year-olds who are more than happy staying at home with their overburdened parents. Most people in non-essential jobs still lack confidence in job retention; recent layoffs attest to this.

Once again Mr Carver says the October GST increase, coupled with the impact of the Emissions Trading Scheme, has seen petrol and household expenses rise. “That will keep consent numbers in check for a while yet. Everywhere you look costs are increasing, mainly driven by the government sector. Take away the government’s price increases and there is little inflationary pressure and, with ongoing global uncertainty, little need to increase the OCR, which penalises the consumer and the productive sectors of the economy.

“The government needs to step up to restore consumer confidence in new home building and renovations, and to restore industry viability. In short, the July increase in the OCR was unwarranted and has hurt the housing sector. Earlier in the year many of New Zealand’s leading economists were predicting further rises in the OCR in 2010 and into 2011. “This was clearly flawed thinking. Once again they were all wrong. Maybe they should spend more time at the coalface, listening to what is really going on, than talking.

“I believe the next move in the OCR needs to be and may well be a reduction. Let’s see what happens.”

ENDS

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