Last week's quantitative easing by the US Federal Reserve, designed to pump $US600 billion plus into the economy could hinder the international recovery, Reserve Bank governor Alan Bollard said today.The moves by the US central bank “ appear to be s
Last week’s quantitative easing by the US Federal Reserve, designed to pump $US600 billion plus into the economy could hinder the international recovery, Reserve Bank governor Alan Bollard said today.
The moves by the US central bank “ appear to be supporting risk asset markets, but they are also putting pressure on capital inflows and exchange rates in third country economies, which is problematic for international rebalancing,” Dr Bollard said at the release of the Reserve Bank’s biannual Financial Stability Report.
The report itself notes that other countries, mostly in Europe, are using quantitative easing policies and the Reserve Bank sounds a decidedly sceptical note on the moves.
With fiscal policy in those countries already very loose, and interest rates cut almost as low as they can go, “fiscal and monetary authorities in advanced economies now have les headroom, if any, to cushion a further weakening in growth or to backstop their financial systems.
“While additional quantitative easing measures are being used to help stimulate economic growth, their effectiveness remains uncertain.”
This latest report emphasised international issues rather than domestic, although it also points to the continuing high levels of debt carried by New Zealanders.
The report also highlights the large government deficits in some countries, particularly in Europe, and says because financial markets are now questioning the sustainability of those deficits those countries are having to remove their fiscal stimulus sooner than they would perhaps like to.
This removal, at a time their economies are still weak, is also slowing the economic recovery in those countries, he said, with further downward pressure on the global economy.
Although New Zealand exporters are not as directly exposed to these economies as we once were, there could still be a significant indirect impact, the report says.
This is due to the confidence factor.
“In contrast, Australia and emerging Asia have continued to grow strongly despite the weak recovery of the major developed economies.” The main concern in this region is taming overheated demand, and this could have a detrimental effect on the New Zealand economy.
The surge in Chinese property prices over the past year and a slowdown, even if engineered by the monetary authorities in that country, “could materially affect New Zealand, particularly in New Zealand’s export prices fall.”
That is particularly dangerous for exporters who are already carrying high debt. The overall debt levels of individual New Zealanders remains the country’s “key vulnerability,” the report says.
The high debt levels carried by some parts of the farm sector, particularly those who borrowed for expansion at the peak of land prices in the middle of the decade.
Farm prices dropped 15% in 2009 after their peak the previous year and have fallen further since, although the Reserve Bank cannot put a figure on how far simply because there have been so few actual sales.
The continued rise in the New Zealand dollar vs the US dollar – and the quantitative easing effort last week has put further upward pressure on our currency – is going to hurt the returns to farmers.
Elsewhere in the local economy, the business sector appears to be improving, but again the report sounds a warning.
The number of firms reporting a high level of overdue debtors has dropped a little since the worst of the recession but it is still high, with the building sector the worst hit.
Smaller to medium sized firms are particularly vulnerable – especially as they have been most affected buy tighter bank lending criteria since the recession.
