Lashing Out Isn't Leadership, Dr Cullen
Michael Cullen's temper tantrums this morning misjudge the proper role of a Minister of Finance, National Finance spokesperson Bill English said today.
"Dr Cullen has lashed out at small business operators, business leaders, the Employers Federation and economic commentators, blaming them for the fall in the dollar.
"Sadly, this is a classic case of shooting the messenger. New Zealand families and businesses are paying dearly for the collapse of the Kiwi dollar. Until the Government acknowledges that its own policies and attitudes have contributed to the crisis of confidence, New Zealanders will keep on paying.
"Instead of stamping his feet, Dr Cullen should sit down and look at the facts.
"That's what I've been doing. So to help Dr Cullen see reality, I'll share my observations with him.
"The facts as we observe them are laid out below," Mr English said.
The Fall Of The Dollar
The New Zealand Dollar is sitting at around fifteen-year lows, sentiment is still strongly negative, or "soggy" as Dr Cullen concedes. Despite the rally overnight, further falls cannot be ruled out, and indeed seem likely.
New Zealand has a large and persistent current account deficit but that is an old story and its not necessarily driving the current bout of dollar depression. A structural adjustment is required to shift resources from the non-tradeables to the tradeables sector.
However, we are close to the point whereby that change moves from an orderly transition to one of risking a recession in the domestic economy.
Why Are We Here?
Earlier this year, there were widely-held expectations that the NZD would recover. But a number of factors have transpired to keep downward pressure on the NZD:
1) The strength of the USD has had a significant impact. However, this only tells part of the story. Since the election the NZD has fallen 16% against the USD, but we have also fallen 14% against the Japanese Yen, 8% against the British Pound, 6% against the Australian dollar, and 3% against the Euro. The story is not solely about the strength of the USD, but the weakness of the NZD.
2) Trade data has continued to disappoint and it needs now to come right fast. While there has been some turnaround in the trade balance, it has not been as fast as expected earlier in the year. This is largely due to the continued strength in imports.
3) Government policy is perceived as negative at home and internationally. International investors are watching all markets closely and weighing up the best opportunities for investment. New Zealand no longer stands out as an attractive investment destination. Renationalisation of ACC, the Employment Relations Act, the tariffs freeze, higher taxes and higher Government spending are all moves against contemporary economic wisdom and therefore negative for the New Zealand economy. There is no special reason to invest in New Zealand. Added to that, there is a growing perception that the Government has a fixed, immovable anti-business attitude
The Implications Are Significant And Far Reaching:
1) Household budgets will continue to be squeezed by higher prices for imported goods such as petrol. So far, many businesses have been able to absorb the higher costs caused by the falling NZD, but will not be able to do this much longer. As prices rise, consumption will drop. Households have already been warned by the Reserve Bank not to expect compensation for higher prices by demanding wage increases. This will simply lead to higher interest rates.
2) Importers who are reliant on imports of final goods have been absorbing much of the lower exchange rate into ever tighter margins. They cannot absorb much more. The issue then becomes one of raising prices or cutting costs - and the biggest quick cut is jobs.
3) Producers reliant on imported inputs are seeing their costs rise and are becoming less competitive. There is a difference between a competitive NZD and a NZD that is too low. Already we have seen the Manufacturers Federation warn about the implications of further weakness in the New Zealand dollar. This will have an impact on investment and employment decisions.
4) Wages. The new Employment Relations Act hands a big stick to better organised unions, particularly where there are skill shortages. The wage round has started with claims of up to 30% and strikes. For every successful large wage claim there will be as many who cannot recoup the increased cost of living, because on average, we are getting poorer. This could develop into a wage price spiral with some big losers.
The Reserve Bank is concerned about the implications of a lower exchange rate on the rate of inflation. As businesses find they cannot absorb any further margin pressure, prices will rise. The Bank will not respond to the direct impact of the lower exchange rate flowing through, but will not want to see this become more generalised inflationary pressure (including pressure on wages). If that is the case, they will be forced to tighten monetary policy (i.e. higher interest rates), risking a domestic recession.