If anything emphasised the recessed state of an economy, especially New Zealand’s it was the final paragraph of yesterday’s rate cut statement from the country’s Reserve Bank.
In it Governor Alan Bollard made it clear that the current Official Cash Rate as of yesterday of 2.5% would stay that low until well into 2010 and could even drift "modestly lower".
That’s a long recession, or rather a long recession and very sluggish recovery.
Could this be what lies ahead for Australia, the US, Germany, Japan and many other advanced economies in the next 18 months to 2 years?
"We consider it appropriate to provide further policy stimulus to the economy. We expect to keep the OCR at or below the current level through until the latter part of 2010.
"The OCR could still move modestly lower over the coming quarters,” The statement concluded.
Not even the Reserve Bank of Australia has been prepared to predict that official rates will remain that low.
The rate cut or its 0.50% size wasn’t a surprise, it was this commitment to maintaining rates at or below the current record low for up to another 18 months, perhaps more.
Mr Bollard said in the statement yesterday: “Overall, developments since March point to lower medium-term inflation than previously projected.
"The main factors behind this are weaker global growth, and an unwarranted tightening in financial conditions via both higher long-term interest rates and a stronger exchange rate than expected.
“Global financial markets have showed some tentative signs of stabilisation since the March Monetary Policy Statement and governments in the major economies are continuing to make progress in resolving their banking system difficulties.
“However, a large amount still needs to be done and sentiment remains fragile. Negative feedback from the global recession could also still adversely affect financial institutions.
“The world economy deteriorated further than expected in the first quarter of 2009.
"While monetary and fiscal policy responses in many countries have been substantial and there are some signs of stabilisation in some countries, we still expect the adverse economic forces generated by the crisis to remain dominant throughout 2009.
“The timing and extent of global recovery remain highly uncertain.
“While the New Zealand economy has not experienced the same extreme falls in economic activity as seen in a number of our trading partners, it remains weak.
"Business sentiment is low, investment has been curtailed and employment reduced.
“We expect the large decline in the OCR over the past year to pass through to more borrowers over coming quarters as existing fixed-rate mortgages come up for re-pricing.
"This, together with the stimulus from fiscal policy, will act to support the New Zealand economy and eventually see activity trough and pick up thereafter.
“However, the scale of the global financial crisis and domestic adjustments underway are such that it is likely to be some time before economic activity returns to robust and healthy levels."
Part of the answer can be found in the final paragraph above.
New Zealand mortgage products are dominated by fixed rate loans and as a result rate cuts take time to be passed on to borrowers through refinancing mortgages after the fixed rate period (usually two years, and sometimes three expire).
That’s unlike Australia where the overwhelming majority of mortgages are variable and rate cuts (and rises of course) are passed through fairly quickly, even if the banks grabbed most of the last 0.25% cut in April by the RBA.
In Australia we’ve had 4.25% of official rate cuts with around 3.80% passed through to home loan borrowers.
So far Mr Bollard has cut interest rates by 5.75% since July of last year against our 4.25%.
Remember how Mr Bollard kept New Zealand’s cash rate above 8% for a long time to try and crush inflation?
The New Zealand economy is in its sixth quarter of recession as the global downturn curbs exports and business investment.
The slump is nowhere as deep as in Germany, the US or Japan: it’s more shallow, but persistent.
Business confidence fell to a 35-year low in the March quarter, according to a survey by the New Zealand Institute of Economic Research Inc, but yesterday news was that it rebounded strong in April..
Investment intentions were the most pessimistic since 1975 and the proportion of companies expecting to sack employees was the highest since 1991.
But a net 15% of respondents in the April National Bank Business Outlook survey expected a deterioration in business conditions in the year ahead, a sharp improvement from the 39% in March who expected conditions to worsen.
Mr Bollard warned last month that NZ unemployment could hit a 10 year high of just under 7% by early next year. Others are saying 8%, from the current rate of around 4.7%.
The latest statement from the RBNZ didn’t have any new economic forecasts. The recent forecasts from the IMF and OECD expect growth of just 0.5% in 2010.
Also out yesterday from Statistics NZ, figures showing home-building approvals fell for the third time in four months in March as the slump and job losses kept people out of the property market.
Approvals dropped 4.6% from February when they gained 11.7%. Excluding apartments, approvals declined 1.3%.
But offsetting that greater business confidence, individual New Zealanders seem more pessimistic about the outlook.
The six-monthly consumer confidence and sentiment survey conducted by researcher
