The Economy

Earlier this month I talked about how the NZ economy is unbalanced. I suggested that conventional conomic theory has no answers to stopping our current situation with a huge current account deficit from continuing to go out of control. The only way that I see this situation working out is for NZ to experience what economists call a "sharp correction". Most people know this as a depression.

Well today the STUFF website had an article in which it says companies are starting to come to this realisation too.

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New Zealand's stellar economic run could be drawing to a close, with a string of recent corporate downgrades suggesting the tide is turning.

Several of the country's top listed companies have indicated in recent weeks that they are starting to feel the pinch of a slowing economy, with higher costs – due largely to rocketing fuel prices – and the strong New Zealand dollar, taking a bite out of earnings.

Last week Contact Energy, the country's biggest energy company and the local bourse's second largest stock, said it expected fuel prices to squeeze margins and slow growth.

Last month wood products company Carter Holt Harvey cut its annual earnings forecast by 11 per cent citing lower prices and higher foreign exchange costs.

This week, the downgrades continued.

National carrier Air New Zealand yesterday slashed its full year profit forecast, before tax and abnormals, by more than half to $100 million.
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My strong suggestion at the moment is to ensure you have some solid savings behind you. Also, if you are in the house market, sell now, wait 6 months to a year and then buy. If you have a business that is struggling because of the high dollar, just hold on. We are about to see the NZ dollar come tumbling down.

Interest rates are a little more difficult to predict. It depends on whether the Reserve Bank (RB) realises that what ever it does with interest rates it will have no effect on the economy. Inflation is likely to blow out as the exchange rate declines and at this point the RB may decide to increase them to try to reduce inflation. This is classical economic theory but it will not work. So it may be worth while locking up your mortgage onto a fixed interest rate but then again interest rates may decline with the reduction in demand to borrow as investment in the housing market closes down.

Anyway... those are my predictions on things economic.