Reserve Bank Forecasts

I’ve been going through the data on which the Reserve Bank based their announcement today that they intend to lower the OCR later this year. It is not pretty:

• Inflation projected to hit 4.7% by September 2008 – this will be the highest inflation has been since December 1990.
• Economic Growth to slow to under 1% in 2009
• The lowest level of house sales in 18 years
• A drop in the TWI from over 70 to around 60
• A rise in unemployment from 3.6% to 6%
• A drop in house prices of 13%

I almost pity Bill English who is likely to inherit this. Not as bad as 1990 but nothing like the booming economy Dr Cullen inherited in 1999.

The summary is NZers will have almost big price rises, low economic growth, around $70,000 knocked off the value of their family home, and around 50,000 more unemployed

The MPS noted:

Faced with lower nominal income growth and higher consumer prices, households must decide whether to take on extra debt or lower their standard of living.

What a lovely choice. However the Reserve Bank hints at an answer:

Many households will need to devote a high proportion of their income to debt servicing costs, limiting their discretionary spending. High global food and energy prices will have a large impact on the spending power of households. The domestic prices of these goods will be pushed up further by a weaker New Zealand dollar. The tax cuts and increased transfers announced in Budget 2008 will provide some offset to these rising costs over late 2008 and early 2009.

So further tax cuts would provide further assistance to households facing a choice between extra debt or lower living standards. Labour is crying that further tax cuts will mean cutting of public expenditure. So they seem to be saying that households should cut their standard of living, rather than have the Government cut its expenditure!