New Zealand’s unemployment rate rose to 6.8 percent during the June quarter, compared to a level of 6 percent in the prior quarter. The latest figure represents a 19 000 person increase in national unemployment, bringing the total to approximately 159 000. The statistics were released government’s Household Labour Force Survey, released on August 5th.

Last month Alan Bollard, Governor of the New Zealand Reserve Bank, predicted an unemployment rate figure of only 6 percent. National economists believe that the Governor’s recent decision to raise New Zealand’s Official Cash Rate (OCR) was based on the more optimistic prediction. Explaining the unexpected rise, Statistics New Zealand released a statement saying ,”This rise in unemployment follows an unseasonal drop recorded in the March 2010 quarter and indicates a period of volatility in the labour market.”

Opposition party leaders have already struck out at the National Party, claiming that the unemployment rate is a direct result of the Government’s poor economic policies. Phil Goff, Labour Party leader, said “Kiwis have had enough of gimmicks like the Jobs Summit and the cycleway – they want action from the government to get them back into work.”

Photo by The Labour Party

New Zealand has continued down a path of a relatively healthy economic recovery in recent months, despite a small slowdown in selected growth figures. On July 29th Allan Bollard, Governor of the Reserve Bank, revealed that the current conditions are adequate to warrant a slight withdrawal of stimulus policy and a 25 basis point increase the Official Cash Rate (OCR). The rate will now be 3.0 percent.

New Zealand’s near and medium-term forecasts for GDP growth remain strong, riding the confidence of the manufacturing industry and the forestry sector’s resilient growth. Business investment is also expected to pick up over the medium-term, with a great positive impact on national growth. However, the Reserve Bank has revealed that domestic demand is marginally lower than during the previous OCR adjustment, with public spending and household credit showing dampened growth. Additionally, business investment is below previous forecasts.

Despite the handful of decreased growth predictions, Alan Bollard maintains that the latest OCR increase is justified. Even at its adjusted level, the OCR is still very supportive of economic growth, although the pace and extent of future rate movements will need to be reexamined. The Reserve Bank Governor did note that with the new OCR and the Government’s upcoming GST rate increase, national inflation could temporarily climb above 3 percent. However, the effect is expected to be short term, and the Treasury will monitor its effects closely to ascertain the complete economic impact.

Photo by Brenda Anderson

On June 10th the Reserve bank of New Zealand (RBNZ) announced the first change in New Zealand’s OCR since April 30th 2009. At the latest OCR review, the rate was increased by 0.25 percent to a new level of 2.75 percent. The rate has remained unchanged for the last 8 OCR review sessions.

Alan Bollard, Governor of the RBNZ, explained the change, saying, “…the economy has entered its second year of recovery with growth becoming more broad-based.” The alteration has also been attributed to the strong recovery of the New Zealand’s key economic trading partners, especially the Asia region, Australia, and the US. Local economists expect several more upwards adjustments throughout the 2010 year, barring an unexpected downturn in the global financial situation. The Governor added that the OCR will be reviewed and adjusted in line with the withdrawal of Government stimulus measures, as dictated by the economic environment.

According to Alan Bollard, economic growth is expected to reach 3.5 percent throughout the 2010 and 2011 years. The growth is attributed to an improved demand for export goods, a rising labor market, along with residential and business investment.

Photo by Frederic Poirot

At the quarterly Reserve Bank OCR Review, on January 28th, it was announced that the rate would remain at its current level of 2.5 percent. Alan Bollard, Reserve Bank Governor, said that the decision comes as a result of the economy remaining consistent with projections made in the December Monetary Policy Statement. He continued on to say that the annual CPI inflation is situated squarely in the target band and is expected to remain within the area over the medium term.

The New Zealand OCR has remained at 2.5 percent since April 30th, 2009. It has been unchanged through six OCR review announcements. Economists predict that the rate will be raised in mid-2010 if evidence surfaces regarding the sustainability of New Zealand’s current economic recovery.

Expanding on his decision, Alan Bollard explained that rising economic conditions across the world are driving the price of New Zealand commodities higher, aiding in the country’s recovery. Though the Governor expressed concern regarding the ability of Australia and Asian nations to maintain their economic upturns. Further, he claimed that the New Zealand Government’s fiscal and monetary stimulus policies have aided the country’s recover, but could be withdrawn in mid-2010, as the need for them declines.

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Alan Bollard made comment on November 11th regarding New Zealand’s reliance on debt-fueled property investments. Though he did not go into specifics, he made it clear that it is the belief of the Reserve Bank that tax measures should be instated that would reduce the relative tax advantage that exists with investment in the housing sector.

Summing up his argument, Alan Bollard claimed that “for a number of years we have made a point of the need to ensure property investment is not particularly advantaged in terms of tax. When it is, it draws funds into the housing sector, creating strong demand for mortgages and external funding, and putting pressure on the dollar and the external sector”.

He said that he would like to see the average New Zealand household increase their savings, thereby decreasing the amount of debt that must be sourced from overseas. Which according to the November 11th released Reserve Bank Financial Stability Report stands at above 40%

According to statements made by John Key, New Zealand Prime Minister, and reports by the New Zealand Reserve Bank, the economy will continue to recover over the second half of 2009. The Prime Minister said that the New Zealand GDP in the fourth quarter will be “quite good” and that the third quarter figure “won’t be bad either”.

The recovering economic figures are due highly to the recovery of the Australian economy, destination for approximately one quarter of New Zealand’s exports. This prompted Alan Bollard, Reserve Bank Governor, to issue a waring that while New Zealand and Australia and New Zealand are closely related, they are not the same economy and act differently. According to him, New Zealand is “slower and more vulnerable”. He continued to say that “a difference financial markets do not appear to appreciate”. He wared that investors seem to be treating New Zealand and Australia the same, and that while looking at the current recovery, this was a mistake.

Several economic indicators are serving to confirm the recovery sentiment. House prices have risen 7.9 percent since January, business confidence is at a 10-year high. Consumer spending and confidence reports are also positive. The Reserve Bank statements give indicator that their policy of fiscal stimulus will not cease until mid-2010.

On the 29th of October it was revealed that the Reserve Bank of New Zealand has decided to maintain the New Zealand OCR at 2.5%. The review was the fourth which had led to an unchanged OCR, the last alteration being on the 12th of March 2009.

According to Alan Bollard, Reserve Bank Governor, there seemed to be no reason to withdraw the monetary policy stimulus. Further, New Zealand’s inflation is currently on par with the Reserve Bank’s 1-3% inflation aim. Although it was stated by the Reserve Bank Governor that the current level of the New Zealand dollar is hindering the countries recovery. He said “The high level of the New Zealand dollar has limited the scope for exports to contribute to the recovery and reinforces a bias toward domestic expenditure,” Bollard said. “The current composition of growth continues to raise questions about its sustainability. These concerns would intensify if credit growth began to propel stronger domestic demand.”

In a statement on the 10th of September, Alan Bollard, Reserve Bank Governor stated that he would support the introduction of a property speculation tax in New Zealand. He provided no firm mechanics on any such possible system, but a brief overview of the idea was described. Levies could be imposed on owner unoccupied housing, possibly immediately or if sold within a preset time period. The idea behind such a tax would be to rein in property speculation and balance the benefits of investing in housing with equal investments in the business sector. It was made adamant that any such system would not be imposed on owner occupied housing.

Opposition to the idea has already been voiced by the Business Roundtable and the Property Investors Federation. Both claim that the imposition of any such tax would not serve to yield any great profits or be an effective control for the housing market. Doubt was raised as to whether such a tax, if imposed at reasonable levels, would serve as a deterrent to property market speculation, or increase proportional investment in businesses.

For the second review in a row Reserve Bank Governor Alan Bollard has opted not to increase the Official Cash Rate (OCR) of New Zealand. The change came as no big surprise to commentators or market participants, with no movements of particular note to be seen on the foreign exchange or equity market.

In regards to the decision, Alan Bollard, in a Reserve Bank release said “Despite signs of a leveling off in economic activity, the economy remains weak. We continue to expect to see a patchy recovery get underway toward the end of the year, but it will be some time before growth returns to healthy levels.” He went onto say that while most factors seemed to be close to the June Monetary Policy Statement estimates, the level of the New Zealand dollar was cause for some concern at the current time.

The Reserve Bank has taken an expected move and once again cut the New Zealand OCR by 50 basis points, bringing it to 3%, from its previous position of 3.5%.

At first glance, the move is a relatively small one, especially since it has been preceded by numerous previous cuts, many of a much greater magnitude. The smaller cuts were driven by the Reserve Bank’s relatively positive future outlook for the New Zealand economy.

It seems that many economists were counting on a higher cut, the level of the New Zealand dollar reflects the fact that a higher cut was expected. Before the announcement, the New Zealand dollar was trading at US 0.5080c, post announcement it was at US 0.5120c. This could also be attributed to the unexpectedly optimistic speech and predictions for the economy made by Alan Bollard during he cut announcement.

At the moment, initial economic predictions for the April and June OCR revisions will be at 25 basis points each, unless the economic situation changes heavily.