Rate rises wrong as economy stalls: NZIER

His comments come with this morning's release of NZIER's June quarter Quarterly Survey of Business Opinion, showing a drop in optimism and actual activity experienced across the economy, and a fall in seasonally adjusted business confidence from 36% to 28% between the March and June quarters.

"It's not quite double-dip recession, more a stumbling recovery," said Eaqub, but the very weak growth evident in the QSBO showed a far weaker economy than would normally be expected a year into the recovery.

"Of concern is a renewed weakness in manufacturing, construction, and investment intentions.

"Small firms, which tend to lead the economic cycle, experienced deteriorating conditions in the June 2010 quarter. The outlook is still fragile."

The economy had "yet again" failed to deliver on expectations of a stronger recovery, with some weakening of export activity underpinning ongoing weakness in the domestic economy, where retailers' previously strong expectations were now falling and becoming more realistic, said Eaqub.

"The household sector is far more cautious than at any stage that we've seen in the last decade or so."

Eaqub was almost alone among economists urging the RBNZ not to raise the Official Cash Rate last month, and the latest QSBO bore out his caution, he said.

"The domestic economy is very weak, the international situation remains particularly volatile. The Reserve Bank should have waited and the numbers we are seeing show that., It's a mistake to be raising interest rates when the economy is not growing."

Inflationary pressures, as measured by the QSBO, remained subdued, and sucgh pressure as there is may reflect the combined effect of emissions trading scheme, ACC and GST increases.

Comments from our readers

On 6 July 2010 at 3:10 pm funny said:

You are so funny, as present OCR is disable, increase/decrease irrelavent to interest rates in NZ market, do not cry - "Eaqub was almost alone among economists urging the RBNZ not to raise the Official Cash Rate last month, and the latest QSBO bore out his caution, he said.

On 6 July 2010 at 10:20 pm w k said:

Imagine a person who is not breathing, and RBNZ tried to resusitate him. At the very first sign of the slightest breath, RBNZ stopped giving the oxygen.
If the person dies, RBNZ will scratch their head and wondered why didn't he survive. Aye, it is not funny if that happens man.

On 8 July 2010 at 1:14 pm Trevor said:

To say that increase/decrease OCR is irrelavent to interest rates in NZ is incorrect, the economy is stalling and Eaquab were the brave ones that spoke out not to raise the OCR. We are still a long way off on this recovery and the fixed rates lowering of late supports Eaquubs original statement. Always a hidden agenda from anylists/Banks. And by the way, go back 2 years and see the difference between the OCR and Lending rates and tell me who is better off. Not the consumer!Australia Banks!!. Good on you Kiwi Bank :)

On 15 July 2010 at 2:27 am ARRRRRGGHHHH said:

Of course the economy is weak! You can see that businesses are hurting - non-stop 'sales' & discounts from retailers since 2008! This has a flow-on effect on other businesses - yes small businesses are hurting. This is definitely so for Europe, USA. Remember that SBs form the backbone of any economy - they create jobs but with finance so hard to get they are struggling. Don't think that this does not effect us - if credit is hard to get in the West you can be sure 'our' banks will also find it hard (& expensive) to get finance - but they will pass on the COSTS to us (non-aussie)CONSUMERS! Also just because Aust raised their rates does not mean nz has to follow (they seem to set a precedent for nz)-we just can't compare with oz. There is the likelihood of a double-dip recession so while we have had one increase the July one should be postponed. There are still many who are struggling just to eat and mortgagee sales are increasing. A second interest rate hike + looming 15% GST- (how EVIL TO TAX BASIC FOODS WITH GST!) Why don't the govt copy GOOD practices from Aust like exempting basic foods FROM GST???!! Food is SO EXPENSIVE ALREADY - NO FRILLS FOR SO MANY WHO ARE STRUGGLING WITH JUST BASIC STUFFS LIKE MILK, BREAD, BUTTER (LUXURY) ETC never mind eating MEAT!! It's so ludicrous that we produce so much food yet kids and old folks etc are going hungry because of the HIGH COST OF THESE FOODS! And that is BEFORE GST HIKE OF 15%!! The most vulnerable people in society will be the ones who SUFFER THE MOST, not those MPS with their FAT PAYCHECKS AND MINISTERIAL CREDIT CARDS!! "LET THEM EAT CAKE!!" cried Marie Antoinette when peasants could not afford bread! The French Revolution nor history for that matter has taught POLITICIANS ANY LESSON AT ALL (while they DINED AND WINED ON OUR CREDIT CARDS!). Perhaps the Guillotine might jolt MPs' "brains" er, I mean conscience (am I asking too much?) ... that it is NOT A GOOD IDEA for the NZ EXPENDABLE-CLASS TO GO HUNGRY!!! A hungry man is a dangerous man!! Commit political hara-kiri if they go down that track!!

On 15 July 2010 at 3:40 pm ARRRRRGGHHHH said:

ABOUT THE HIGH COST OF FOOD:
Following on from the above, and from the recent revelation that the (ozzie) middlemen aka supermarkets, are screwing producers and consumers alike, what is the govt going to do about it? It was suggested that we create a Supermarket Ombudsman. If that is the case make sure you get one armed with FANGS AND CLAWS!! - of Sabre-tooth-Tiger dimensions!! because hungry folks cannot survive on hot air!! And don't give us that lame excuse of monopoly versus oligopoly before you take action - change the law - whatever it takes!! Hard times demand hard actions ... and fast! We want food-price reductions
and zero-GST on basic food stuffs!! Now that MPs have dined and wined on OUR CREDIT CARDS .. EARN YOUR KEEP!!

Rate rises wrong as economy stalls: NZIER

The Reserve Bank of New Zealand should stop raising interest rates, amid worrying evidence that the economy recovery is stalling, says New Zealand Institute of Economic Research Quarterly Survey of Business Opinion chief economist Shamubeel Eaqub.

Tuesday, July 6th 2010, 11:44AM 5 Comments

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