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New Zealand GDP Better Than Expected

New Zealand’s economy shrunk by -0.9% in the three months ending 2008 after economists had expected this south-Pacific country’s GDP to contract by more. The move marks the fourth straight quarter that the island-nation has seen its annual output decrease.

Since July the central bank has slashed interest rates by 5.25% to 3.0% in an effort to provide short-term liquidity to businesses and financial markets in order to stave off the effects of the global recession.

Now, in its fourth straight quarter of contraction, the New Zealand economy has shed thousands of job. In the final three months of 2008, their unemployment rate jumped 0.4 percentage points to 4.6%, the highest level since 2003. Their Treasury department predicts that it will get worse. They have forecast that by early 2010 the jobless rate may jump to an 11-year high of 7.2%.

Yesterday, the IMF released a report stating that New Zealand’s economy would contract a total of 2.0% in 2009 after 2008 experienced a slight 0.1% decrease. One key “vulnerability” that is likely to keep the country under water is the extensive amount of short-term borrowing from abroad, the IMF said.

This final period of the year saw the country’s currency depreciate by as much as -20.95%, but ended the quarter down only 10.15%.

– LG

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New Zealand Economy Will Contract 2% in 2009, Says IMF

In a report filed by the International Monetary Fund (IMF) the Washington-based body said that the New Zealand economy will contract by 2.0% this year. “The near-term outlook is weak,” they mentioned. “Households are constrained by high debt levels, falling house and equity prices and uncertain employment prospects,” they added.

The startling words come after Bill English, New Zealand’s Minister of Finance, said that the current account gap is “uncomfortable large”. Indeed, the actual figure for the current account balance in the final quarter of 2008 came in at -4.026, surprisingly better than in the three-month period prior. Despite what would look to be as a positive sign, the deficit-GDP ratio actually became weaker, coming in at -8.9% from -8.6% the period prior.

Claims of weakness in the country are legitimate. Now, in its fifth straight quarter of contraction, the New Zealand economy has shed thousands of job. In the final three months of 2008, their unemployment rate jumped 0.4 percentage points to 4.6%, the highest level since 2003. Their Treasury department predicts that it will get worse. They have forecast that by early 2010 the jobless rate may jump to an 11-year high of 7.2%.

One “key vulnerably” is the country’s substantial level of short-term financing from abroad. With the central bank slashing rates by 5.25% since July, foreigners have been continuously disincentivized to invest in these debts with maturities of less than one year. The IMF may have been too cautious here. Albeit this may seem to be a risk on an absolute basis, the fact that short-term rates abroad are much lower than those in New Zealand may actually direct a greater amount of these foreign cash flows towards this South-Pacific economy.

Now, since Mid-March the New Zealand Dollar has fallen by as much as 40.4% against it’s U.S. counterpart. Generally, such a bearish movle would lead investors in domestically denominated short-term debt to flock away in hysteria. But what if their was an expectation that the currency would begin to rise in value? Under such a case, one would expect exchange rate risk to be of less of concern.

We are seeing such a pattern now. From the low on Mar. 3rd, the currency has rebounded 17.95%. This may be due to the inflationary fears that the Federal Reserve, with its plan to buy $1.2 trillion in treasury and agency/mortgage securities, has sparked among global investors. During this time we have also seen gold rally 7.43% and crude (West Texas Intermediate) break out of a range bound environment and rally 37% to as much as $54.18.

Historically we have seen a strong correlation between the New Zealand currency and commodities. A 180-day rolling correlation with the S&P Goldman Sachs Commodities Index shows that these two instruments have a correlation of .9688, a very substantial relationship.

Thus, if inflationary fears are correct (which the commodities markets seem to believe) then the New Zealand Dollar is likely to continue rising. Hence short-term financing from abroad may actually increase and not decrease.

– LG

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CHINA’S PREMIER WEN JIABAO ‘WORRIED’ ABOUT U.S. INVESTMENTS

CHINA ‘WORRIED’ ABOUT U.S. INVESTMENTS

In November, the Chinese government announced that it would be implementing a stimulus package worth $915 billion. Details of the plan were not so readily available and made it difficult for economists to estimate the impact that it would have on the global economy. Just recently, however, the former head of the nation’s statistic bureau stated that they would be removing export taxes on many industries hurt by the crisis.

Moments ago China’s Premier Wen Jiabao spoke at a news conference and offered greater insight into the government’s thinking. He stated that the communist government has prepared other measures in case of greater problems head. He also said that they had a “full arsenal” to stimulate the economy. Wen may have been taking a shot at the U.S. legislature, saying that China can “at any time…introduce new stimulus.” It has “reserved adequate ammunition” to do so.

In a startling note, he also mentioned that they are concerned over the security of its investments in the U.S. He then urged the U.S. government to “ensure the safety” of its American assets. “We have lent a huge amount of money to the United States” and that “of course we are concerned about the safety of our assets. To be honest, I am a little bit worried.”

On foreign exchange intervention, Wen seemed a bit defensive. He argued that that the Yuan appreciated against a wide-range of currencies, but that the currency’s upward swing has hurt its exports. He also reiterated their stance on diversifying the basket against which the Yuan is pegged to. “No country” can “pressure” them to appreciate or depreciate the currency.

– LG

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IMF: World Suffering From IMF: World Suffering From “Great Recession”

The International Monetary Fund (IMF) stated that the world is now suffering from a “Great Recession” that could trigger wide-spread poverty and civil unrest. “The global financial crisis, that might now be called the great recession, provides a sobering backdrop to our conference,” said IMF Managing Director Dominique Strauss-Kahn today. The institution, which was created after WWII, now “expects global growth to slow below zero this year, the worst performance in most of our lifetimes,” the managing director said.

A global effort to alleviate the consequences of this global recession will not only benefit the incomes of those in the developing world, but will also help their residents remain safe. “this is not only about protecting economic growth and household incomes – it is also about containing the threat of civil unrest,” Strauss-Kahn added. “I urge partner countries to support me in this,” he also noted.

Yesterday, the IMF’s sister institution, the World Bank, stated that the global economy would shrink for the first time since WWII. Bank president Robert Zoellick stated that “we need to react in real time to a growing crisis that is hurting people in developing countries.”

– LG

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Reserve Bank of Australia Holds Rate Steady For First Time in Seven Months; Currency Jumps

The Reserve Bank of Australia held its overnight cash rate at 3.25% despite expectations calling for a 0.25% cut in the main policy rate. For the first time in seven months, the central bank left rates unchanged after an aggressive rate slashing campaign that began in August. Since then, the RBA has sought to prop the ailing south-pacific economy by easing liquidity. Throughout those seven months, the bank slashed the rate by 400 basis points from 7.25% to 3.25% in early February.

Expectations, however, deviated quite substantially. Of the 18 economists that Bloomberg had surveyed, four called for the bank to hold the rate steady while seven expected a 50 basis point cut. The remaining seven favored a 25 basis point move down.

The Australian Dollar jumped 48 pips against its U.S. counterpart in the seconds following the announcement.

Interestingly enough, the pair also spiked just seconds before the rate announcement, implying that some institution was made aware of the decision BEFORE it was made public.

AUD/USD Jumpes Seconds After Rate Decision; Prepared by Luis Gil using FXTrek Intellichart

AUD/USD Jumpes Seconds After Rate Decision; Prepared by Luis Gil using FXTrek Intellichart

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Australian Retail Sales Unexpectedly Jumped in January

Australian retail sales rose unexpectedly in the month of January. At 0.2%, the rise in sales aggressively overshot expectations of a -0.5% decline in the figure. Spending was bolstered by the government’s distribution of A$8.9 billion ($5.6 billion) in cash grants to families as a result of the stimulus package passed in late January. Prime Minister Kevin Rudd announced that they would continue distributing more cash. In fact, another A$12.7 billion will be sent to lower and middle-income families and individuals.

The greatest gains in spending came in the form of eating out at cafes and restaurants. This sector of the overall metric rose 2.3%, but hasn’t shrunken since October. On the contrary, spending on household goods fell a substantial 4.0%, lending clues as to the underlying sentiment being felt among the public. That is, spending on durable (big-ticket) goods like washers, refrigerators, and television has probably also fallen. Furthermore, this could imply that people are reluctant to purchase such items because of the fear they may have over losing their house due to delinquencies in mortgage payments.

– LG

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RBA’s Stevens: Stimulus Effects Seen at Year’s End, More Cuts If Needed

Reserve Bank of Australia Governor Glenn Stevens is a realist to say the least. His pessimistic outlook over the near-term failed to be outnumbered by his longer-term outlook of his engineered economy. In a semi-annual testimony to the governing parliament, Australia’s monetary chief Stevens stated that “no policy response could stop near-term weakness.” He further added that the South-Pacific nation would be suffering dearly in the coming 9 months as “bad debts” continued to rise. Unfortunately for the Reserve Bank, which began slashing rates in early June from 8.25% to 3.25% at the end of January, the effects of monetary easing have only begun, the Governor stated.

China

Stevens addressed optimism over China’s economy. He went so far as to say that the Asian behemoth has yet to fully realize its economic strength. Indeed, their “emergence hasn’t finished,” he professed. His strong belief that trade with China will drive his economy leads him to believe that the Australian economy will begin to recover in the following year.

Policy

Finally, Stevens pointed out that the bank will cut rates if needed. But as he pointed out, the effects of the fiscal stimulus, which was signed into law last week, will not be felt until the end of the year. Chances are, that with such a lagged fiscal policy effect, that the RBA will cut in the near-term. Despite the substantial downside potential for overnight rate cuts, Stevens noted that there was little chance that they would be adopting a zero interest rate policy. In fact, rate cuts can get to the point of “little impact.”

On a positive note, the Governor stated that half of Australian mortgages are actually ahead on payments and that interest rate cuts have worked best in his country thus far. – LG

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Japanese Economy Shrinks at Annualized 12.7% Pace, Worst Since 1974

Japan’s Gross Domestic Product fell for the third consecutive quarter in the final three months of 2008, by -3.3% as demand for the Asian country’s flagship goods such as cars and electronics took a dive on slowing global consumption. On an annualized basis, the data signaled that the island economy had contracted at an annualized -12.7% pace. Economists had forecast the metric to fall by only -3.1% on the quarter.

Slowing global demand for the country’s goods continued hampering Japan’s ability to weather the storm. Sales of vehicles manufactured in Japan throughout January fell by largest amount in at least 29 years. Indeed, the January reading of the said car data fell -27.9% in the 12 months through Jan. 31st. As such, it was of little surprise that the export portion of the metric fell by -13.9% in the period alone.

With spending on Japanese goods plummeting by so much it was no surprise that new spending on entrepreneurial projects took a steep dive as well. Non-residential investments fell for the fourth consecutive quarter, by -5.3% in the last. -LG

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Stimulus Plan Clears Australia’s Senate; A$42 Billion

In a 30-28 vote, Australia’s Senate passed Prime Minister Kevin Rudd’s second attempt at a A$42 billion ($28 billion) stimulus package after being thwarted off yesterday. The plan, which focuses on cash distributions to families and working people along with infrastructure spending, aims to prevent the nation’s first recession since 1991. Indeed a$12.7 billion will be directly redistributed to the public while A$28.8 billion will be set for school and environmental construction.

Rudd, whose plan was initially rejected yesterday, was forced to divert a greater portion of the money towards environmental projects and to reduce cash distributions in order to garner additional support.

Initially leading the opposition, key independent senator Nick Xenephon warmed to the proposition, stating that he is “pleased to say I believe we have been able to reach a compromise.” Leading up to the second attempt of passage, Treasurer Wayne Swan stated that “we are prepared to act in the national interest.”

Had the package been defeated a second time, the entire notion would have been abandoned.

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New Zealand Sales Decline Fourth Straight Quarter

Retail Sales in New Zealand fell for a fourth consecutive quarter, the longest decline since records began. December alone saw the metric fall by 1.0% after economists had forecast the number to slip by only 0.7%. The previous month saw a slight uptick in the metric of 0.1%.

It seems that South Pacific country is substantially cutting back on entertainment expenditures as fears of a further deepening of the receding economy grips the population’s outlook for future income. Interestingly enough, the “Bars/Clubs” category of spending fell for the third consecutive month – by 3.8% in December – the most since last February. In fact, the final quarter of the year saw spending in this category fall 8.2%.

Economic activity in the south-pacific country shrunk in the first three quarters of 2008 and is expected to shrink yet again in the final. Q3 saw gross domestic product contract by 0.1% on an annualized basis alone. The rate of unemployment in Q4 jumped by the greatest magnitude in nearly 11 years, from 4.2% to 4.6%. – LG

Filed under: Economics, Global Economics, World, , , , , ,

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