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ASB Economic Weekly

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Fuseworks Media
Fuseworks Media

Recent economic data have been very encouraging, prompting the RBNZ to signal it would reverse the 50 basis point 'insurance' cut very soon providing the economy continues to recover and global risks recede. Since this assessment, economic data have continued to highlight NZ's robust recovery over 2011. The strength in growth has been particularly impressive given the challenges Canterbury has faced over this year.

However, while growth is resilient in NZ, the global situation is deteriorating. The risks to global outlook have increased, and in light of this the RBNZ needs to take more time before it lifts the OCR. It needs time to assess the impact of weaker US and European growth and a possible Greek default on NZ and our key trading partners Australia and China. For now, activity in China remains buoyant and NZ export commodity prices remain firm, but it could just be a matter of time. Meanwhile, momentum may be fading in Australia's multi-speed economy, as jobs growth slows and unemployment increases. Even so, Q2 GDP exceeded expectations.

The Eurozone sovereign debt crisis continues to be the centre of anxiety. The Greek economy is struggling, and speculation of a default is growing exponentially by the day. Investors continue to doubt the Greek Government's ability to meet the terms of its aid package. Even if it did, there are also concerns that Germany may lack the political support to continue to fund the bailouts. Eurozone leaders lack consensus on the best approach to deal with the crisis. Indeed, views of senior members from official agencies are so fractured it led to the shock resignation of ECB board member Stark over the weekend. Germany and France are starting to concentrate on how to shore up their own banks in the event Greece defaults.

Developments in the US are equally uninspiring. Economic data continue to confirm the US economy is sluggish. There is a growing expectation that the Fed will provide further stimulus at the upcoming meeting (September 22nd). Markets are expecting the Fed will adopt the 'twist' - shifting asset purchases into longer-dated securities and selling its shorter dated holdings of US Treasuries (which should remain anchored by the Fed's pledge to hold rates low until mid-2013). President Obama is looking to do his bit as well, announcing a $447 billion package to stimulate jobs growth. The package involves a mixture of tax cuts and increased infrastructure spending. The question will be if these measures are enough to reinvigorate the US recovery.

The RBNZ is navigating a particularly uncertain global economic environment. While NZ economic data have been encouraging, lessons from 2010 highlight the fragility that may remain despite the robust exterior. Give the risks to the global environment, holding off on rate hikes for now would be a prudent approach.

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