Markets jittery but showing early signs of defrosting

The roller coaster ride felt in global markets has tested world economies, businesses, households and their practices. While New Zealand has been less affected than most, the latest ASB quarterly economic forecast illustrates the wild ride the economy has been on. Markets have calmed to some extent, but volatility will remain a fact of life..

During the last quarter, events overseas continued to take us by surprise, snowballing in dramatic fashion, culminating in large falls in equity markets and the effective freezing up of credit markets in the US and Europe.

However, governments have been responding swiftly to the chain of events. The US and European governments and their central banks have developed comprehensive rescue packages to unfreeze their credit markets, recognising the need to restore confidence.

“There are early, encouraging signs that these markets are starting to defrost, though it is likely to be some time before markets start to function entirely normally and we will continue to see vulnerabilities” says Nick Tuffley, ASB Chief Economist. The commitment from the governments involved has demonstrated that they have the willpower to do whatever is necessary to restore order.”

“NZ has been fortunate to avoid being directly caught up in the woes that broke out of the US, however we aren’t immune to these impacts and are likely to feel the effects as global credit will be more difficult to obtain. This combined with lower consumer demand through the weaker US and European markets will flow through to lower demand for NZ’s exports both directly and indirectly,” says Nick Tuffley.

Although NZ cannot completely escape these global impacts, we have some buffers to help absorb the impact. The NZ dollar lost considerable ground this year, providing insulation against weaker global demand. The Reserve Bank moved swiftly to drop interest rates by 175 basis points to date, including an unprecedented 100 basis points drop on 23 October. October’s tax cuts also arrived at a fortuitous time, petrol prices have retreated noticeably and we have seen the more recent vegetable price increases subsiding. Bit by bit we will have more money in our pockets and the dollar will go slightly further than it has been recently.

These factors will help to turn the NZ economy around next year, though it will be a very slow recovery. Many challenges lie ahead on the global front that have yet to make their presence felt.

Things have been tough for much of 2008, and will remain challenging over the next year. In times like these managing your cash flows and business relationships becomes even more important. Now is a good opportunity to look at how you run your business or manage your personal financial affairs and ask yourself what you could do better to see you come out on the other side fitter and stronger.

(ENDS)
Released by Debby Bell, Head of Corporate Communications, ASB 027 4992 563